Despite media narratives, America’s wealthiest households foot the nation’s tax bill. In fact, the top 1% of earners account for more than 40% of all income taxes paid. This figure increased after former President Trump’s Tax Cuts and Jobs Act (TCJA), which was supposed to lower taxes.
The good news is that there are tried and true strategies for lowering your tax obligation. Read on to learn four tax planning strategies for high-income earners. Explore relevant tax topics such as retirement contributions and charitable donations.
1. Retirement Contributions
Making retirement contributions is one of the most effective ways to protect your cash, while minimizing your tax liability at the same time. The max retirement contribution for 2023 has increased to $22,500. This is a $2,000 increase from the year prior.
You can make this contribution to any qualifying retirement savings plan including 401(k), 403(b), most 457s, and the Thrift Savings Plan (TSP). You can also make contributions to an Individual Retirement Account (IRA). The limit on IRA contributions is $6,500.
There are also catch-up provisions that allow you to exceed this limit. If you fail to utilize the maximum contribution in years prior, you can save up to $30,000 per year.
2. Charitable Donations
Charitable donations are another way to reduce your tax liability. Here, you can direct your money to a favorite nonprofit organization and lower your taxable income.
This is an effective strategy for churchgoers. You can donate to your child’s Little League or other non-profit sports organization.
Donations made to schools and non-profit medical organizations also qualify. You can even donate stock shares to your favorite charity.
Lastly, donor-advised funds and charitable remainder trusts (CRT) are advanced strategies for high-income earners. A financial professional can help you set these up.
3. Hire Family
For business owners, hiring your spouse or working age children is a great way to protect your earnings. Instead of paying Uncle Sam, you can keep the money in the family.
This strategy works by shifting income to a lower tax bracket. For example, married individuals pay a 35% tax rate on $500,000 annual income. You could pay one of your children a $40,000 salary and it would fall in a 12% tax bracket.
4. Maximize Tax Deductions
There are many other federal and state tax provisions that allow you to maximize deductions. The mortgage interest deduction is one of the most popular. This is an impactful deduction, as mortgage rates are now more than 7%.
You can deduct medical expenses over 7.5% of your annual income. If you have a qualifying home office, you can further reduce your taxable income. Property taxes and business vehicles are other popular deductions.
Your Guide to Tax Planning Strategies for High-Income Earners
You are now ready to file your 2023 taxes and pay the lowest effective tax rate possible. Many taxpayers rely on software to file their taxes and impactful deductions are passed over.
Tax planning with a professional can help you preserve more of your earnings. If you want to discuss tax planning strategies for high-income earners, contact us today to speak with an experienced professional.