Whether you’ve successfully started a business or paid your dues to climb the corporate ladder, you’ve put in the hours and made sacrifices to find yourself among the ranks of high-income earners.
But with great success comes great responsibility, particularly when it comes to managing your taxes. As a high-income earner, you have unique opportunities and challenges when it comes to tax planning — ensuring you settle up with Uncle Sam while continuing to grow your wealth.
Here are some tax-planning strategies that may be effective in helping a high-earning taxpayer save more cash:
Utilize retirement accounts. Contributions to retirement accounts such as a 401(k) or an Individual Retirement Account (IRA) can provide immediate tax benefits as you save for the future. By maxing out your contributions to these accounts, you can reduce your taxable income, potentially moving you into a lower tax bracket.
Additionally, any earnings within the account grow tax-deferred, meaning you don’t owe taxes on them until you withdraw the money in retirement — when you might find yourself in a lower tax bracket. Keep in mind, the SECURE Act lets high-income earners age 50 and over save $27,000 a year in a 401(k), so your earnings are sheltered from tax until you take a distribution from the account at age 59 ½ or later.
Take advantage of a Roth conversion. Some high-income earners may be eligible for a Roth IRA conversion — a strategy that converts a traditional IRA to a Roth IRA, allowing for tax-free withdrawals in retirement. While the conversion is taxable in the year it occurs, it can be a savvy move for high-income earners who expect to eventually be in a higher tax bracket.
Establish a family trust. Family trusts are common in estate planning, ensuring certain beneficiaries receive assets when the grantor dies. And when properly structured, a family trust, for example, can help reduce your state income tax liability by moving your investment earnings to a relative with lower marginal tax rates.
Make charitable donations. By donating to qualified charitable organizations, you can support causes you care about, while providing valuable tax benefits. However, it’s important to note that the tax benefits vary depending on the type of donation and your overall income level. You may consider establishing donor-advised funds (DAFs) to manage and distribute charitable donations over time. By contributing appreciated assets — like stocks or real estate — to a DAF, you can potentially avoid capital gains taxes, while still benefiting from the charitable donation.
Consider cash-value life insurance. Also referred to as whole life insurance, cash-value life insurance is one of the most popular tax deferral strategies for high-income earners, especially if you’ve maxed out other retirement accounts. Contributions are made with after-tax dollars, and you can borrow against or withdraw up to the amount of premiums paid without having to pay taxes on it.
Invest in opportunity zones. Created by the Tax Cut and Jobs Act of 2017, the Opportunity Zones tax incentive is an economic development tool, allowing people to invest in distressed areas to help the community and receive a tax benefit. You’ll be granted a tax deferral on the capital gain of the investment until December 31, 2025, or until it is sold prior to this date — whichever comes first.
Keep more of your hard-earned money
As a high-income earner, taking steps to optimize your tax situation is a critical aspect of your financial planning. The professionals at Magone & Company help, offering the guidance and expertise to plan your wealth-preserving tax strategy. Reach out to learn more.
This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances.