A higher income may result in increased federal and state tax obligations. You might believe your tax burden will increase because you earn more money, but that isn’t always the case.
You might be one of the high earners with a target on your back. The IRS has a plan in place to target high-income earners. The surprising thing about this is how much lower than most people would expect they draw the demarcation line. You are most likely in their sights if your yearly income exceeds $200K.
You must strike a balance as a US taxpayer between paying your fair share and making decisions that will enable you to keep increasing your wealth. As a high earner, having effective tax planning strategies is a crucial aspect of financial management. It allows you to make financial savings and file your taxes in a way that lowers your tax obligation.
You’ll be relieved to learn that there are numerous tax-reduction strategies available for high-income earners if you’re in a high tax bracket.
High-income earners and wealthy individuals may need help to keep up with the most recent tax planning techniques due to the frequent changes in tax laws and growing complexity.
Everybody may have a different tax planning strategy.
The best tax planning strategies for you depend on various variables, including your income, investments, and deductions. Tax planning aims to reduce the amount of taxes owed to the government or increase the amount of money you receive back from it in the form of a refund.
Who is Considered High Earners?
High earners are people who currently have a lot of disposable income and stand a good chance of becoming extremely wealthy in the future. According to the IRS, any taxpayer who declares $200,000 or more in total positive income filling their tax return is considered a high-income earner. The total of all positive amounts indicated for various courses of income reported on an individual tax return is considered total positive income.
Due to the income range for their professions, many professionals, including lawyers, doctors, dentists, and others, have the potential to be high earners. They are considered “working rich” because a large portion of their projected wealth is based on a six-figure income rather than assets that can generate income. As a result, when they stop working, their wealth will decrease.
Best Tax Strategies
1.Contribute as much as possible to deductible tax-deferred accounts
These include “qualified” retirement accounts like IRAs, 401(K)s, SEPs, and others. The standard rule is that you can deduct your contribution from your taxable income, and the assets grow tax-free until you withdraw them and that the assets will grow tax-free until you withdraw them, despite the laws governing the maximum contributions being, to put it mildly, inconsistent. The deductible amount varies from $6,000 per person at the low to about $27,000 at the high. You can also contribute more money—roughly $40,500 per person—if you run your own business.
2.Maximize the benefits of education accounts
Let’s not overlook 529 plans, one of our preferred tools as financial planners. Even though a 529 plan doesn’t let you deduct your contribution from your federal income taxes, it does allow you to grow your money tax-free. Additionally, withdrawals are made tax-free for qualified education expenses, which include up to $10,000 in elementary and secondary school tuition for private, public, or religious schools.
Contributing to a 529 is an excellent choice if you’re attempting to lower your federal estate taxes. A participant in a 529 plan may contribute up to $15,000 using the annual gift tax exclusion for 2022 or up to $75,000 in one lump sum using the five-year election strategy. Using this strategy, any contributions are taken out of your gross taxable estate, which can have rates as high as 40%.
3.Think about a Roth Conversion.
In retirement, Roth IRAs allow for 100% qualified tax-free distributions. If you earn a lot of money, you may be unable to contribute to a Roth IRA if your earnings exceed a certain threshold.Traditional IRA assets, on the other hand, can be converted to Roth IRA assets.
When you finish the conversion, you must pay tax on it. However, you could make qualified withdrawals from your Roth account in the future without paying income tax on those distributions. You would also be able to avoid taking required minimum distributions starting at the age of 72.
4.Consider Donor-Advised Fund
If you have a particularly high-income year (perhaps because you sold your business or a valuable restricted stock vested), you might want to consider a Donor Advised Fund. With this vehicle, you can make grants to organizations over time or allow your contributions to the Fund to grow tax-free for future transformational giving. Also, a DAF can serve as a source of legacy that you establish, which is a great way to get your family and the next generation involved in giving.
Tax-saving strategies for high-income earners could help you owe the IRS less each year. However, keep in mind that the tax code is constantly changing. So, what works this year may not be as effective – or even possible – in three or five years. Reviewing your tax situation helps avoid missing out on savings opportunities.