Earning a higher income may result in paying more taxes at both the federal and state levels. If you’re in a high tax bracket, you’ll be relieved to know that there are numerous tax-cutting techniques for high-income workers. However, you must be diligent enough to seek them on your own, or consult with a financial advisor or tax strategist who can help you. Tax laws change often, and the increased complexity can make it difficult for high-income earners and high-net-worth individuals to keep up with the latest tax techniques. Here is an up-to-date list, as of the time of publication (in 2024), of some tax strategies that you can implement immediately as a high-income earner.
Above the Line Deductions
Above the line deductions are crucial since lowering your AGI may allow you to claim extra deductions or credits. You can start by utilizing Health Savings Account contributions (assuming your health plan meets certain qualifications), which are tax-deductible. This deduction is especially great because the money will also grow tax-free and come out of the plan tax-free (again if certain qualifications are met). The contribution limits for 2024 are $4,150 for self-coverage and $8,300 for a family plan. Individuals 55 or older get an extra $1,000 added to these limits.
It is also very easy to get reductions if your retirement plan is offered by your employer. The income stated on IRS form 1040 is net of any pre-tax retirement plan contributions.
The previous two deductions are for people in the accumulation phase of life. For those on the other end of the retirement spectrum, consider a qualified charitable distribution (QCD). A QCD is a direct payment from an IRA to a qualifying charity for individuals over the age of 70 ½. By partaking in such a maneuver, the IRS permits you to make tax-free payments from your IRA to organizations such as your church or favorite charity, and satisfy part or all of your required minimum distribution (RMD) without increasing your taxable income.
Below the Line Deductions
Below the line deductions are determined after your AGI is calculated, and therefore, will reduce your taxable income but will not reduce your AGI or MAGI.
Choosing to itemize deductions (adding up individual below the line deductions) instead of taking the standard deduction can be beneficial for anyone who has a high enough amount of below the line deductions. High income earners are more likely than others to take advantage of itemizing. The most common examples of these sorts of deductions include charitable deductions, state and local tax (SALT) deduction, and the mortgage interest deduction. In 2024, up to $750,000 in financed principal indebtedness may be tax deductible.
Consider a Roth Conversion or take a Qualified Distribution
Converting tax-deferred IRA savings to a Roth IRA allows you to pay taxes on the converted amount now, but any future growth can be withdrawn tax-free in retirement. Plus, Roth IRAs are not subject to RMDs. This strategy can be advantageous for those who expect to be in a higher tax bracket in the future. It allows for potential long-term growth without the obligation of future withdrawals, providing greater flexibility in managing retirement funds.
If you’re 59½ or older, you can make penalty-free withdrawals from your traditional tax-deferred accounts. These withdrawals are taxed at your ordinary income tax rate in the year of withdrawal. This approach might be better than a Roth conversion if you need the funds in less than five years, especially if your current income is lower than what you expect in the future, potentially reducing your overall lifetime taxation.
Contribute to a 529 Account
A 529 college savings account is a tax-advantaged tool designed to help pay for education expenses, with contributions not deductible at the federal level but possibly offering state tax breaks. The money grows tax-deferred and withdrawals are tax-free when used for qualified educational expenses. While contributing to a 529 might not impact your current income tax situation, it can help reduce both future taxes and possibly estate tax liability. Also, a special “loophole” in the tax law called “superfunding” applies only to 529s: You can contribute up to five times the annual gift tax exclusion limit at once, removing those contributions from your gross taxable estate while still preserving your current unified credit amount.
By using these tax strategies, high-income earners can effectively lower their tax burden and enhance their take-home pay. Whether you’re leveraging above-the-line deductions like HSAs, making strategic Roth conversions, or contributing to a 529 plan, each approach offers unique benefits to help you keep more of your earnings and pay less to Uncle Sam. Staying informed and consulting with a tax planning professional can help you tailor these strategies to your situation, ensuring you maximize your savings and comply with the latest tax laws.