High-income earners can benefit significantly from strategic tax planning to reduce their taxable income, maximize deductions, and optimize savings. Here are the top 11 tax strategies for high-income earners:
1. Maximize Retirement Contributions:
•401(k), 403(b), or 457 Plans: Provide the maximum allowable amount to your employer-sponsored retirement plan. For 2024, the contribution limit is $23,000, with an additional $7,500 catch-up contribution if you’re 50 or older.
•Traditional IRA: If possible, contribute to a traditional IRA for tax-deferred growth. Contributions may be deductible depending on your income and whether you participate in an employer-sponsored retirement plan.
•Backdoor Roth IRA: If your income exceeds the limits for direct Roth IRA contributions, consider using the backdoor Roth IRA strategy. This involves contributing to a traditional IRA and then converting it to a Roth IRA, allowing for tax-free growth and withdrawals in retirement.
2. Contribute to Health Savings Accounts (HSAs):
•HSA Contributions: If you have a high-deductible health plan (HDHP), contribute to an HSA. These are tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses.
For 2024, the contribution limit is $4,150 for individual coverage and $8,300 for family coverage, with an additional $1,000 catch-up contribution for those 55 and older.
•Investment Growth: HSAs can also be used as an investment vehicle for long-term savings. These funds roll over each year and can be invested in various options.
3. Utilize Tax-Efficient Investments:
•Municipal Bonds: Interest earned on municipal bonds is generally exempt from federal taxes and, in some cases, state and local taxes. This makes them a tax-efficient investment for high-income earners.
•Tax-Loss Harvesting: Offset capital gains by selling investments that have lost value. This strategy can reduce your overall taxable income and help manage capital gains taxes.
•Long-Term Capital Gains: Hold investments for at least one year to qualify for long-term capital gains tax rates, which are lower than ordinary income tax rates.
4. Optimize Charitable Giving:
•Donor-Advised Funds: Contribute to a donor-advised fund to receive an immediate tax deduction, while retaining the flexibility to distribute funds to charities over time.
•Charitable Bunching: If itemizing deductions, consider bunching charitable contributions into a single tax year to exceed the standard deduction and maximize your tax savings.
5. Income Shifting and Splitting:
•Shifting: Shift income to family members in lower tax brackets. For example, if you own a business, you might hire family members and pay them a reasonable salary, reducing your taxable income.
•Gifting: Use the annual gift tax exclusion ($17,000 per recipient in 2024) to transfer wealth to family members without triggering gift taxes. Over time, this can reduce your taxable estate.
6. Defer Income:
•401(k) Contributions: Maximize contributions to retirement accounts like a 401(k), which helps defer your income.
•Stock Options: Receiving stock options can help you strategically time the exercise and sale of stock options to manage when the income is recognized for tax purposes.
7. Use a Qualified Business Income (QBI) Deduction:
•20% QBI Deduction: If you have income from a pass-through entity (e.g., LLC, S corporation, partnership), you may be eligible for the QBI deduction, which allows you to deduct up to 20% of qualified business income. High-income earners should carefully structure their business and compensation to maximize this deduction.
8. Maximize Depreciation Deductions:
•Bonus Depreciation: Under current tax laws, businesses can take 80% bonus depreciation on certain qualified property in the year it’s placed in service. This allows for significant upfront deductions, reducing taxable income.
•Section 179 Deduction: Business owners can also take advantage of the Section 179 deduction, which allows them to deduct the full purchase price of qualifying equipment or software up to $1.16 million in 2024.
9. Estate Planning:
•Lifetime Gift and Estate Tax Exemption: In 2024, the federal estate and gift tax exemption is $13.92 million per individual ($27.84 million for married couples). High-income earners should consider strategies like irrevocable trusts, gifting, and family limited partnerships to reduce their taxable estate and pass wealth efficiently to heirs.
•Grantor Retained Annuity Trusts (GRATs): GRATs can be used to transfer appreciating assets to beneficiaries while minimizing gift taxes.
10. Consider Tax-Advantaged Accounts for Education:
•529 Plans: Contributions to 529 college savings plans grow tax-free, and withdrawals are tax-free when used for qualified education expenses. Some states also offer tax deductions or credits for contributions.
11. Deductions and Credits:
•Itemized Deductions: If you have significant mortgage interest, medical expenses, or charitable contributions, itemizing deductions instead of taking the standard deduction may reduce your taxable income.
•Energy-Efficient Home Improvements: Take advantage of tax credits for energy-efficient home improvements, such as installing solar panels or upgrading to energy-efficient windows.
It is essential for high-income earners to establish a strategic plan for effective wealth management. Given the complexities of tax laws, creating a tax strategy that aligns with your unique financial circumstances and objectives is critical. Be sure to speak with a qualified wealth consultant before making any decisions that could impact your future. Give us a call today!
