You might think that with more earnings come more taxes. Fortunately, this is not always the case. High earners have a unique opportunity to save on their taxes by taking advantage of various tax deductions, credits, and strategies. If this is going to be your first ride as a high earner or you are already in this club, why don’t you learn from the pros?
A report by the Internal Revenue Service (IRS) indicates that the top 1% of all income earners in the US paid an average of $616,000 in federal income tax in 2018. This was about 26.8% of their income. Most of the high earners hire professionals from Incite Tax and other accounting firms to enjoy less tax burden on their shoulders.
While this might seem like a large amount, it’s actually much lower than the 39.6% top marginal tax rate that applies to their income bracket. So what’s the key? High earners are able to reduce their taxable income through various tax deductions and credits, resulting in a lower tax burden. Here are some tax-saving tips for high earners:
Max Out Retirement Contributions
One of the smartest moves for high earners is to maximize retirement contributions. This not only boosts your savings but also reduces your taxable income. For 2023, you can choose to contribute up to $22,500 to a 401(k) plan or even more if you’re over 50.
That extra catch-up contribution allows you to save an additional $7,500 per year. You might also move your money to traditional IRAs as well. Contributions may often be tax-deductible depending on your income and other factors. Even if you’re phased out of deductions due to high earnings, it’s still worth considering a Roth IRA for future tax-free withdrawals. Note that employer-sponsored plans often come with matching contributions. It’s essentially free money—don’t leave it on the table.
Consider HSAs
Health Savings Accounts (HSAs) are a powerful tool for high earners. They offer triple tax benefits, making them an attractive option to reduce taxable income. Contributions to an HSA are tax-deductible. We can safely say that with this, you’re free to lower your overall taxable income simply by setting aside money for health expenses.
It’s like getting a deduction while preparing for future medical needs. Another advantage is that the funds grow tax-free. Any investment gains within the account won’t be taxed as long as they remain in the HSA. Withdrawals for qualified medical expenses? Totally tax-free, too. Maximize your contributions whenever possible to reap these incredible benefits.
Use Tax-Loss Harvesting
Tax-loss harvesting is a savvy strategy for managing your investment taxes. This basically involves selling investments that have significantly lost value to offset gains from profitable ones. This approach can help lower your taxable income, reducing the amount you owe at tax time.
Imagine you sold stocks and made a significant profit but also had a few that tanked. By selling the underperforming assets, you can effectively balance out your gains. Just keep an eye on wash-sale rules when executing this tactic. These regulations prevent taxpayers from claiming losses if they repurchase exactly the same or substantially identical security within 30 days of the sale.
Hire a Tax Professional
For high earners, the stakes are even higher in the tax season. A small oversight can lead to significant financial repercussions. Hiring a tax professional helps you avoid these pitfalls. These experts stay updated on ever-changing regulations and deductions that could apply to your situation. With their knowledge, they can identify strategies tailored for you, maximizing savings while ensuring compliance with the law. They understand nuances in tax codes that might go unnoticed by the average taxpayer. Moreover, working closely with someone experienced provides peace of mind during filing season.
Navigating the complexities of taxes can be challenging, especially for high earners. Being proactive about these strategies allows you not just to keep more of what you earn but also positions yourself for greater financial success down the line with smarter planning today.…
Once you’ve analyzed how much money you spend each month, you need to think about where you can save each month. Any reductions in luxury expenses will form the basis of your emergency fund. Whether full-time or part-time; getting another job could be a great source of additional income. Using all or part of the money you earn at your next work to fund your emergency fund can dramatically reduce the time it takes to reach your goal.