Wonder if you’re paying too much in taxes?
Building wealth is an incredible achievement, but it also comes with the responsibility of protecting and maximizing it. When you reach that coveted millionaire-next-door milestone, you may run into new hurdles when it comes to financial planning and tax optimization. Whether it’s the higher tax brackets, the Alternative Minimum Tax (AMT), or another thing entirely, it’s easy to feel anxiety over whether you’re filing everything appropriately according to your goals.
This is where high-income earners’ tax strategies become crucial. Understanding the tax landscape and implementing smart strategies can potentially reduce your tax liability and keep more of your hard-earned money working for you. Read on to explore six common tax strategies every high-income earner should know.
A Quick Refresh: Tax Brackets for High-Income Earners
The U.S. tax system utilizes a progressive tax structure, meaning tax rates increase as taxable income rises. Millionaires fall into the highest tax brackets, resulting in a larger portion of your income being taxed at a higher rate percentage. For example, in 2024, a single taxpayer earning $500,000 and up falls into the 35-37% tax bracket.
In addition to federal taxes, many states have their own tax policies that can impact you differently. States like California and New York impose higher state income taxes on high earners (sometimes exceeding 10%). Conversely, states such as Texas and Florida do not levy a state income tax, offering a more favorable tax environment for the wealthy.
Beyond your location, things like types of income and investments, various deductions and credits, local taxes, and other factors can all impact your total tax liability.
Here’s the good news: By working with qualified experts, you can find powerful strategies specifically designed to help high-income earners like you minimize your tax liability and keep more of your hard-earned money working for you.
6 Tax Strategies Every High-Income Earner Should Know
1. Know Your Deductions
Did you know that north of a billion dollars were left unclaimed in deductions in 2020 alone?
One of the easiest ways to optimize your wealth is to double-check that you’re claiming any deductions you may qualify for. According to a 2023 report by the IRS, the average itemized deduction claimed by taxpayers in the top 1% of earners was $169,342, significantly contrasting to the average deduction of $3,332 claimed by those in the bottom 50% income bracket.
Common deductions for millionaires include:
- Charitable contributions (which can be deducted up to 60% of your adjusted gross income with specific qualifications)
- Interest on margin loans
- Mortgage interest
- Business expenses, including some office supplies, travel, and salaries
2. Leverage Tax-Advantaged Retirement Accounts
Another simple tax strategy that can be beneficial at nearly any income level is to maximize contributions to your employer-sponsored retirement plans, like 401(k)s, 403(b)s) and Individual Retirement Accounts (IRAs). These accounts offer tax-deferred or tax-free growth on your investments, significantly reducing your tax liability.
For 2024, the maximum contribution limit for a 401(k) is $23,000, with an additional catch-up contribution of $7,500 for those aged 50 and over.
3. Open a Health Savings Account (HSA)
Have medical expenses you’ll need to pay for – or want to have an emergency fund set aside just in case an unexpected health emergency occurs? Meet the millionaire-friendly HSA – or Health Savings Account.
HSAs offer a triple tax whammy: contributions reduce your taxable income upfront, earnings grow tax-free, and qualified medical expense withdrawals are tax-free.
If you’re eligible for an HSA with a high-deductible health plan, consider maxing out your yearly contributions to save on healthcare costs and build a tax-advantaged nest egg for future medical needs. Remember, unused funds roll over from year to year, so you can keep saving and growing your HSA balance over time.
4. Consider Trusts and Charitable Foundations
For those with substantial assets, trusts and charitable foundations can be powerful tools for estate planning and tax reduction.
These sophisticated tools offer a two-pronged approach: strategically reducing your taxable estate for your heirs while also potentially maximizing charitable giving to the causes you care about.
Related: What Will Your Financial Legacy Be?
However, due to the complexities involved in setting up and managing trusts and foundations, consulting with an estate planning attorney is crucial to determine if they fit your specific situation and ensure they are established effectively to achieve your goals.
5. Explore Other Charitable Giving Strategies
Donating to qualified charities allows you to support causes you care about while potentially reducing your tax burden – but you don’t always have to write a check.
Consider donating appreciated assets, like stocks or property, instead of cash. This may allow you to avoid capital gains taxes on the increased value of the asset, maximizing your charitable impact without losing out financially.
For even more flexibility, you can also explore Donor-Advised Funds (DAFs). These accounts allow you to contribute assets upfront and receive an immediate tax deduction. Then, you can recommend grants to your chosen charities over time.
6. Seek Professional Guidance
Tax law can be a labyrinth, especially for those with high incomes. Consulting with an expert you trust can often provide invaluable guidance to help you navigate the complexities and maximize your financial well-being.
Related: Click here to read “The Clarity Difference: Learn What Sets Us Apart from Other Financial Advisors”
The world of taxes can feel complex and overwhelming, but you don’t have to do it alone. With these six strategies in your tax planning toolbox, you can unlock significant benefits and take a proactive approach to your taxes.
Take Control of Your Wealth
Want to discuss how we can optimize your tax strategy in 2024? Contact Clarity Wealth Development for a complimentary and personalized consultation today.
