High income earners often pay a higher percentage of their income in taxes. However, with some planning and smart financial moves, high earners can reduce their tax burden and keep more of their hard-earned money. This comprehensive guide outlines the best tax saving strategies for high income earners, including effective cash flow management.
Understand Your Tax Bracket
The first step is to understand which federal income tax bracket you fall into based on your taxable income. The table below shows the 2024 federal income tax brackets based on taxable income:
Taxable Income | Tax Rate |
| Incomes over $11,600 | 12% |
| Incomes over $47,150 | 22% |
| Incomes over $100,525 | 24% |
| Incomes over $191,950 | 32% |
| Incomes over $243,725 | 35% |
As your income rises, you move into higher brackets and pay more in taxes on each additional dollar earned. Knowing your bracket helps you estimate taxes owed and plan reductions.
“While high income earners do pay higher tax rates, with intentional planning they can take advantage of deductions, deferrals, and other strategies to significantly minimize their tax burden and keep more of their hard-earned money.”
Max Out Retirement Accounts
Contributing to tax-advantaged retirement accounts like 401(k)s and IRAs reduces your taxable income. In 2024, you can contribute up to $23,000 to a 401(k) and $7,000 to an IRA and $8,000 in contributions if over 50. Fund a Roth 401(k) or IRA to get tax-free growth.
If your workplace offers a Roth 401(k), contribute after-tax dollars that grow and withdraw tax-free in retirement. High earners may not qualify for Roth IRAs based on income limits. You should check.
Harvest Investment Losses
Tax-loss harvesting involves strategically selling investments at a loss to offset capital gains. You can deduct up to $3,000 in net losses against regular income annually. Carry any excess forward to offset future gains.
Work with a financial advisor to identify losing positions to sell before year end to lower your tax bill.
Fund an HSA
Contributions to a health savings account (HSA) reduce your taxable income. HSAs offer triple tax benefits: tax deductions on contributions, tax-free growth, and tax-free withdrawals for medical expenses.
Contribute up to $4,150 for individuals and $8,300 for families to an HSA in 2024. Those over 55 can add $1,000 more.
Donate Appreciated Assets
Donating appreciated stocks, mutual funds, or other assets to charity provides a double tax benefit. You avoid capital gains taxes and receive an income tax deduction for the asset’s full fair market value.
Donating over 60% of your adjusted gross income may allow you to carry forward excess deductions up to five years.
Bundle 529 Contributions
You can superfund a 529 college savings account with up to 5 years’ worth of annual gift tax exclusions ($85,000 for couples in 2024) per beneficiary. This removes assets from your estate.
Consider Deferred Compensation
Non-qualified deferred compensation plans let you defer some income to future years when you may be in a lower bracket, such as retirement. Taxes are paid when funds are withdrawn.
Accelerate Business Expenses
If you own a business, look for expenses to pay before year-end to reduce taxable business income. Pay bills early, buy equipment and supplies, and make charitable gifts.
Incorporate Your Business
Sole proprietors may benefit from incorporating as an S corporation. Business profits and losses flow through to your personal return, potentially reducing self-employment taxes.
Expense Healthcare Costs
You can deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income in 2024. This includes health insurance premiums if self-employed.
Claim the Home Office Deduction
If you work from home, calculate the home office deduction by determining the percentage of your home used for business. Deduct that percentage of home expenses like utilities.
Take the QBI Deduction
The qualified business income (QBI) deduction allows many sole proprietors to deduct up to 20% of business income on their personal tax return. The deduction phases out at higher incomes.
Contribute to an FSA
Reduce your taxable income by contributing pre-tax dollars to a flexible spending account (FSA) for healthcare or dependent care. Max $3,200 for healthcare and $5,400 for dependent care in 2024.
Live in a No-Income-Tax State
If possible, reduce your state income tax burden by moving to one of the seven no-income-tax states – Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
Hire Your Kids
Hiring your children under age 18 to work in your business allows them to earn up to $13,590 tax-free in 2024 from you as their sole employer.
Take the Standard Deduction
With a higher 2024 standard deduction of $14,600 for singles, $29,200 for married couples and $21,900 for heads of household. Many high earners no longer itemize. Lean into the standard deduction.
Contribute to an MSA
Contributions to a medical savings account (MSA) reduce your taxable income if you have a high deductible health plan. In 2024, contribute up to $3,200.
Move to Puerto Rico
Moving to Puerto Rico allows you to take advantage of Act 22 and pay only 4% tax on passive income and 0% tax on capital gains. You must live there for at least 183 days a year.
Delay Income
If allowed by your employer, consider delaying a bonus or other income until January of the following year. This defers taxes to the next year when you may be in a lower bracket if income drops.
Accelerate Business Deductions
If you have a business loss for the year, accelerate deductions like equipment purchases, supplies, and business use of your vehicle. Doing so reduces your taxable income.
Take the Pass-Through Deduction
Sole proprietors, S corporation shareholders, partners, and LLC members may qualify for the Section 199A pass-through deduction. Consult a tax pro to calculate.
Income Split with Your Spouse
If your spouse earns less, consider gifting them income-producing assets. This takes advantage of your spouse’s lower marginal tax rate.
Consider Installment Sale
If you sell an appreciated asset like real estate or a business, structure as an installment sale to defer taxes over time versus all at once.
Move Assets into an Irrevocable Trust
Transferring assets into an irrevocable trust removes them from your taxable estate. This can save estate taxes when assets pass to beneficiaries.
Buy Tax-Exempt Bonds
Municipal bond interest is exempt from federal tax and often state tax too. Bonds can provide tax-free income to supplement your high earnings.
Invest in Opportunity Zones
Investing capital gains in a qualified opportunity fund allows you to defer taxes until 2026 and potentially eliminate taxes on new gains.
Use a Donor-Advised Fund
Opening a donor-advised fund through a sponsor like Vanguard or Fidelity allows you to take an immediate tax deduction but make charitable grants over time.
Pay Estimated Taxes Quarterly
Paying your estimated taxes each quarter helps avoid underpayment penalties. High earners must pay in 90% of current year taxes or 110% of prior year.
Contribute to an Alaska PFD Trust
You can reduce estate taxes by gifting up to $16,000 per person annually ($32,000 married) into an Alaska Permanent Fund Dividend Trust.
Exercise Incentive Stock Options Strategically
With ISO employee stock options, wait 12 months after exercise and 24 months after grant before selling shares to receive preferential long-term capital gains tax treatment.
Contribute to a CRUT
A Charitable Remainder Uni Trust (CRUT) lets you transfer assets tax-free and receive income. The remainder goes to charity.
Open an ABLE Account
ABLE accounts allow individuals with disabilities to save up to $16,000 annually without jeopardizing needs-based benefits. Earnings grow tax-free.
Move to a Low Property Tax State
Reduce your property tax burden by moving from a high property tax state like New Jersey to a state with lower property taxes like Alabama or Arkansas.
Bottom Line
It emphasizes understanding your federal and state tax brackets based on taxable income and contributing maximum amounts to pre-tax retirement accounts. Additional strategies include tax-loss harvesting to offset capital gains, funding an HSA, donating appreciated assets to charity, and bundling 529 contributions. Business owners can reduce taxes by accelerating deductions, incorporating, taking QBI deductions, and hiring their minor children.
Other tips include deferring or accelerating income to smooth tax brackets, moving to no income tax states, and using advanced strategies like irrevocable trusts, donor-advised funds, opportunity zone investing, and charitable remainder trusts. Deductions for healthcare costs, home offices, and more can also provide substantial tax savings. While every situation is unique, the article outlines the many options available to high income earners for minimizing taxes through careful planning and preparation.
FAQs
What income level is considered high income?
For individuals, high income is usually considered $200,000 or more annually. High income households have income of $250,000 or more.
What tax bracket do high income earners fall into?
High earners often fall into the 32%, 35% or 37% federal tax brackets. They pay higher rates on each additional dollar earned.
How can high income earners reduce taxes on investments?
Strategies like tax-loss harvesting, donating appreciated assets, and strategically exercising stock options can help reduce investment taxes.
What are examples of tax deductions for high earners?
Examples include 401(k) contributions, health savings account contributions, self-employed health insurance, home office deductions, and charitable donations.
What are tax deferral strategies?
Deferring income with non-qualified deferred compensation, 401(k) contributions, installment sales, opportunity zone investing, and deferred annuities are examples of tax deferral strategies.
How can business owners reduce taxes?
Business owners can open retirement plans, implement an entity structure like an S-Corp, deduct business expenses, take QBI deductions, and more to reduce business taxes.
What are advanced strategies for high income tax reduction?
More advanced strategies include irrevocable trusts, donor-advised funds, charitable remainder trusts, moving to Puerto Rico or other low tax jurisdictions, and other complex vehicles.
