How to Navigate Tax Benefits for High-Income Earners

When your income goes up, you may have to pay more in taxes at both the federal and state levels. You lose more of your income as you move up the income ladder because of graduated tax rates at the federal level and sometimes even at the local level. However, if you know the rules, you can make your tax plan work better for you and save more money. In the same way, a financial adviser can help you make the most of your budget to lower your taxes.

What Does “High Income” Mean?

When you live in a certain place and have certain circumstances, having a high income can mean different things to different people. A high-income worker is someone who makes $500,000 or more a year. But it is possible that you might legally meet the IRS’s definition of a high-income earner and not even know it.

According to the IRS, a person has a high income if they report $200,000 or more in total positive income (TPI) on their tax return. The total amount of positive income on a person’s tax return is the sum of all the positive amounts shown for the different types of income.

Federal Tax on Income

Based on certain amounts of your taxable income, your federal tax bracket tells the IRS how much tax you have to pay. Your taxable income is the amount of money you make after taking out the standard deduction and any additional deductions.

The biggest tax rate that can be used is 37% for both the 2023 and 2024 tax years. If a single person’s taxable income is more than $609,350 ($578,125 in 2023), or if a married couple filing jointly’s income is more than $693,750 ($693,750 in 2023), they fall into this group.

Ways for high-income earners to save on taxes

If you want to lower your tax bill when you make more money, you probably can not just use one method. Instead, there are a number of things you can do to lower your price. You may be able to do some of these on your own, but you may need the help of your financial expert to do others. Here are some of the best ways for people with a lot of money to lower their taxes.

Empty all of your tax-advantaged accounts.

Putting as much money as possible into tax-advantaged accounts can help you pay less in taxes each year. If you have less income that is taxed, it might be easier to move down one or two tax brackets. Here are some accounts that you might want to max out:

401(k) or a similar plan at work

You can have a traditional or SEP IRA, a health savings account (HSA), or both.
It is important to remember that if you are 50 or older, you can also add to your IRA or job plan. After age 55, you can make catch-up payments to your HSA. Do not forget that the amount of standard IRA contributions you can deduct will change if you have a retirement plan at work as well.

Take a look at a Roth Conversion

With a Roth IRA, you can take out qualified distributions tax-free when you leave. For people who make over a certain amount of money, you might not be able to put money into a Roth IRA. You can, however, move money from a standard IRA to a Roth IRA.

On your tax report for that year, you would have to pay tax on the change. But from now on, you would be able to take out eligible withdrawals from your Roth account without having to pay income tax on them. You would also not have to start taking needed minimum distributions when you turn 73.

Put money into a 529 plan

With a 529 college savings account, you can save money on taxes while still getting the help you need to pay for school. At the federal level, you can not deduct the money you put into a 529 plan, but some states may let you get a tax break for doing so. But the money in the account grows tax-free, and transfers are tax-free if they are used for certain school costs.

Putting money into a 529 plan might not change your current income tax situation, but it might lower the amount of death tax you have to pay. One example is that you can put up to five times the annual gift tax deduction amount into a 529 plan all at once. If you do that, those donations will be taken out of your gross taxable wealth.

Give more money to good causes

Giving to charity is one of the most common ways for high-income people to save on taxes. If you give up to 60% of your adjusted gross income to charity, the IRS lets you subtract that amount. The most you can deduct for payments of non-cash assets is 30%.

There are several ways to get tax breaks for giving to charity, such as:

• Giving money straight to a charity that qualifies
• You might not have to pay capital gains tax if you give away valued non-cash assets like stocks.
• Setting up a charitable lead or charitable remainder trust
• Setting up a fund for donors
• Giving money to charity from an IRA while following certain rules

If you are 73 years old and want to put off taking RMDs from a traditional IRA, you might want to think about the last choice. People with an IRA who are over 70.5 years old can use a QCD to give away up to $100,000 per year, which can help them pay less in taxes. Do not forget that you can not remove the same amount for charity this year. You will also need to list the gifts of cash or non-cash items on Schedule A if you want to deduct them.

Look over and change how your assets are allocated

It is important to make sure you are putting your money in the right businesses so you can get the best tax return. For instance, it usually makes sense to keep mutual funds and exchange-traded funds (ETFs) that are less affected by taxes in a taxable account and save funds that are more affected by taxes for your 401(k) or IRA.

To lower your taxes, you could also think about buying local bonds that are not taxed. This bond interest income is not counted toward the Medicare surtax and is not taxed by the federal government either. The money you get from municipal bonds might not be taxed by the state either.

Do not forget that tax loss recovery is on your side. When you harvest losses, you sell stocks at a loss to balance out the capital gains in your portfolio. A loss of up to $3,000 can also be taken off your regular pay. You can carry forward any losses you do not use up in this tax year to the next.

Think about other ways to invest your money

You can put off paying taxes until you make more money with some businesses. For instance, cash-value life insurance lets you build up cash value in your policy. The money that builds up grows without being taxed. Withdrawals that do not go over the amount of premiums you have paid are not taxed.

Annuities could be another way you handle your taxes. For instance, when you buy a deferred annuity, the payments will not start until a certain point in the future. At the same time, the value of the pension grows without being taxed. Withdrawals will be taxed as income later on, but this plan might be worth it if you think your tax rate will be lower when you leave.

Make the most of other deductions

You can write off the interest you pay on a mortgage if you own a home. For the property, you can also deduct state and local taxes. It may not make a big difference in your tax bill if you deduct these costs, but every penny counts when it comes to lowering your taxed income.

If you itemize, you can also deduct medical costs that are more than 7.5% of your adjusted gross income. It might be worth it to take that benefit if you or someone in your family had a lot of medical bills during the year.