How much did you pay in taxes last year?
If the answer is $10K, $20K $50K or more, then let me ask you a second question…
What did you actually DO to reduce your taxes last tax year?
You see, there’s a direct correlation between what you do to reduce your taxes and how big your tax bill is each year.
After speaking with some of the best tax planners in the USA, I’ve compiled a list of the top ways you can legally reduce your tax liability each year.
So with that in mind…
This article will provide an in-depth look at some of the best tax saving strategies used for high income earners to reduce their taxable income.
If you’re short on time, the best and fastest way to reduce your tax liability is to work with a tax planning expert that specializes in reducing your taxes each year.
Working with a tax planner is completely different from working with an accountant, bookkeeper, or CPA.
An accountant specializes in filing your taxes, doing your bookkeeping, and staying compliant.
Whereas a tax planner specifically specializes in helping you reduce your tax liability by taking advantage of tax strategies that you or your accountant may not even be aware of!
Often when you work with a tax planner, they guarantee to save you money in taxes or you pay nothing! This makes working with a tax planner an absolute no-brainer.
Tip: Most people think the more you earn, the more you pay in taxes. But it’s actually the opposite. The more you earn, the more you can save in taxes…With the right tax strategies.
What are the best tax reduction strategies for high-income earners?
Here is a list of some of the best ways to reduce your federal taxes each year.
1. Maximize Tax Deductions
Realizing and exploiting tax deductions is a vital move to minimize taxable income for those with high incomes. By taking advantage of these deductions, you can significantly lower your tax bill and keep more of your hard-earned money.
So if you are a business owner or self-employed individual, it’s essential to track all business expenses that qualify as tax-deductible according to the IRS guidelines. These may include office supplies, travel costs, advertising expenses, employee salaries, and benefits, among others.
A lot of business owners, don’t realize that some personal expenses could actually be business expenses with the right reporting.
That’s why it’s important to speak to a tax planning specialist who can review your expenses and help you figure out what else you could be putting through your business.
2. Mortgage Interest Deductions
If you own a home with a mortgage loan, the interest paid on that loan can be deducted from your taxable income up to specific limits set by the IRS (Tax Policy Center).
This deduction effectively lowers your overall tax burden while encouraging homeownership.
3. Deductible Investment Losses: Tax-Loss Harvesting Strategy
High-income earners should consider implementing an effective tax-loss harvesting strategy to offset capital gains and business income. This can significantly reduce your taxable income.
This involves selling underperforming investments at a loss, which can then be used to offset realized capital gains or up to a certain amount of ordinary income per year.
Do your investment losses exceed the annual limit for the deduction? If so, you can carry forward the remaining amount indefinitely into future tax years until it is fully utilized.
4. Health Savings Accounts (HSAs)
If you have a high-deductible health plan (HDHP), contributing to an HSA allows you to deduct those contributions from your taxable income while providing potential long-term tax advantages.
The funds in an HSA grow tax-free and can be withdrawn tax-free when used for qualified medical expenses (HealthCare.gov).
Additional health savings account contributions include:
Deferred Compensation Plans. High earners can also have access to deferred compensation plans through their employer. These plans allow you to defer receiving a portion of your salary or bonus until retirement or another specified date, effectively deferring taxes on that income.
Self-Employed Retirement Accounts. If you’re self-employed or own a small business, consider setting up a Simplified Employee Pension (SEP) IRA or Solo 401(k). Both options offer higher contribution limits than traditional IRAs and can help reduce your taxable income significantly.
High-income earners can benefit substantially by incorporating strategies that help reduce their taxable income, potentially leading to lower federal tax rates.
Be sure to consult with a financial advisor or tax planning expert who specializes in effective tax strategy planning before implementing any changes to ensure the best outcome based on individual circumstances.
5. Utilize Retirement Accounts
One of the most effective tax reduction strategies for high-income earners is to take advantage of retirement accounts such as 401(k)s, IRAs, and HSAs.
These accounts allow you to contribute pre-tax dollars, which can significantly reduce your taxable income and help you move into a lower tax bracket.
Tip: If you’re already maxing out your 401(k) and IRA contributions but still looking to reduce taxable income further, consider using an HSA as another savings vehicle since there is no “use-it-or-lose-it” rule with these accounts.
High earners can benefit from utilizing retirement accounts, such as indexed universal life insurance companies, to reduce taxable income, and further maximize savings through investing in tax-advantaged funds.
6. Maximize 401(K) Contributions
By maximizing your 401K contributions each year, you can effectively defer taxes on this portion of your income until retirement when you may be in a lower tax bracket.
The 2023 annual contribution limit for a 401(k) plan is $19,500 for individuals under 50 and $26,000 for those aged 50 or above; thus allowing you to defer taxes on this portion of your income until retirement when potentially in a lower tax bracket.
7. Contribute to an IRA or Roth IRA
Another option is contributing to an Individual Retirement Account (IRA). The annual contribution cap for 2023 is $6,500 (under 50) and $7,500 (50+).
While traditional IRAs offer immediate tax deductions on contributions (subject to certain income limits), Roth IRAs provide potential long-term benefits by allowing qualified withdrawals at retirement that are completely tax-free.
8. Invest in Tax-Advantaged Funds
Investing in tax-advantaged funds is an effective tax strategy for high-income earners looking to reduce their taxable income.
By investing in tax-advantaged funds, you can reap the benefits of capital gains and dividend income while minimizing your overall tax liability.
Some popular options include municipal bonds and annuities.
9. Take Advantage of Tax Credits
High earners can leverage tax credits to reduce their federal income taxes on a dollar-for-dollar basis. Unlike deductions, which lower your taxable income, tax credits directly reduce the amount of taxes you owe on a dollar-for-dollar basis. By taking advantage of various tax credits available, high earners can significantly decrease their federal income tax burden.
Some popular and valuable tax credits that may be applicable to high-income earners include:
- Child Tax Credit (CTC): The CTC can give a refundable credit per child if certain requirements are met.
- Residential Renewable Energy Tax Credit: Homeowners who install solar panels or other renewable energy systems can receive a credit if certain requirements are met.
In addition to these widely-known options, there are numerous other specialized tax credits available based on specific circumstances. This includes education expenses or adoption costs.
“For businesses, the Research and Development Tax Credit can be an especially beneficial tax credit to take advantage of, as it allows businesses to recoup the costs of investing in research and development activities.
It’s essential for high earners seeking ways to reduce taxes owed to explore all potential avenues of various tax credits.
For best results, work with a knowledgeable tax professional who can help you navigate the complex landscape of available options. They will be able to identify which credits apply to your unique situation. They can ensure that you’re taking full advantage of them on your income tax return.
Be aware that some tax credits may be subject to income caps or phase-out thresholds. This could result in their reduction or complete removal depending on your modified adjusted gross income (MAGI).
Exploiting tax credits can be a means for top earners to lower their taxable revenue and save money.
10. Consider Relocating
Relocating to a state with lower taxes or a city that offers tax incentives may be an attractive option for high-income earners looking to reduce their taxable income.
By doing this you can potentially save thousands of dollars in state and local taxes each year!
Here are some US states with no income tax:
- New Hampshire (only taxes interest and dividend income)
- South Dakota
- Tennessee (phasing out its Hall Tax on interest and dividends by the end of 2023)
Some states have lower tax rates or no state income tax, which can help reduce your tax burden.
11. Business vehicle deductions
High-income earners can receive a tax deduction for vehicles if they use them for business purposes.
The deduction includes depreciation, lease payments, gas and oil expenses, insurance costs, license fees, registration fees and other related expenses.
How much you can claim depends on how much the car is used for business purposes.
When filing taxes, you will need to provide documentation showing expenses related to your business vehicle. This includes how often it was used for business purposes.
12. Charitable Contributions
By donating to charitable causes, high-income earners can reduce their taxable income (subject to certain limitations).
Be sure to maintain proper documentation of your donations for claiming this deduction on your federal income tax return.
In conclusion, high-income earners can reduce their taxable income through various tax reduction strategies, including:
- Maximizing tax deductions
- Utilizing retirement accounts
- Investing in tax-advantaged funds
- Taking advantage of tax credits
- Relocating to a state with lower income tax
By implementing these effective tax strategies, you can lower your federal income taxes and avoid capital gains taxes. This will help keep more money in your pockets.
Ashley Davis (or ‘Ash’ for short) is the CEO & Founder of Skyline Social. For over 15 years, he has been helping business owners with lead generation. Ash specializes in helping businesses get high-quality leads, appointments and clients each month in an automated, scalable and profitable way. You can watch his free Masterclass training to learn more.