15 Tax Saving Strategies for High-Income Earners

Earning a high income is great until you realize how much you have to pay in taxes. Fortunately, our tax-saving strategies may help lower your taxable income. In this blog, we’ll show you how to reduce taxable income for high earners to keep more of your hard-earned money. 

What is a High-Income Earner According to the IRS? 

The IRS considers you a high-income earner based on your taxable income and which federal tax bracket you fall into. 

In 2024, high-income earners fall into the top tax brackets, ranging from 24% to 37%. If you’re single and earn over $191,951 in taxable income, or if you’re married filing jointly and make over $383,901, you’re a high-income earner. The highest bracket applies to those making more than $609,350 for singles and $693,750 for joint filers. 

The IRS also looks at your Total Positive Income (TPI) to determine whether you’re a high-income earner. Your TPI includes all positive sources of income on your tax return. These can be wages, dividends, and business income. If that number exceeds $200,000, the IRS may view you as a high-income taxpayer, even if your taxable income doesn’t place you in the highest tax brackets. 

Here is a breakdown of the 2024 tax brackets based on filing status:

15 Simple Tax Saving Strategies for High-Income Earners

Do you want to keep more of your hard-earned money? Here are some effective tax-saving strategies for high-income earners. 

1. Maximize Retirement Contributions

Contributing the maximum amount to your retirement accounts, such as a 401(k) or an IRA, reduces your taxable income for the year, as these contributions are tax-deductible. This is the primary purpose of tax-deferred retirement accounts. 

For 2024, you can contribute up to $23,000 to your 401(k) if you’re under 50; if you’re 50 or older, you can make an additional $7,500 in catch-up contributions. Whether you have a traditional or gold IRA, you can contribute up to $7,000 if you’re under 50 or $8,500 if you’re older. 

Not only are your contributions deducted from your taxable income, but they also grow tax-free until you withdraw them in retirement. 

2. Use a Health Savings Account

With a health savings account (HSA), you get a triple tax advantage:

• First, your contributions to the HSA are made with pre-tax dollars, lowering your annual taxable income.
• Second, the money in your account grows tax-free.
• Third, withdrawals for qualified medical expenses are also tax-free.

In 2024, individuals can contribute up to $4,150, and families up to $8,300. If you’re 55 or older, you can add an extra $1,000 as a catch-up contribution.

The funds in your account roll over each year, which means you don’t need to spend all the money before the year ends. 

3. Invest in Municipal Bonds

A municipal bond is a loan you give to the city or local government and get interest in return.

Municipal bonds are a tax-efficient investment because the interest income they generate is usually exempt from federal taxes, making them one of the effective tax saving strategies for high-income earners. In some cases, it is also exempt from state and local taxes, depending on where you live and where the bonds are issued. 

This type of bond usually has lower returns compared to taxable bonds, but the tax savings can more than make up for it. 

Investing in municipal bonds is a great addition to a balanced investment portfolio, especially because they carry low risk and provide a relatively stable income stream. 

4. Convert to a Roth IRA

When you’re 59.5 years old and have had a Roth IRA account for at least five years, withdrawals from your account are completely tax-free. So, if possible, consider converting your traditional IRA or 401(k) into a Roth IRA to maximize high-income tax planning. To do this, you’ll need to contact your financial institution or plan administrator to transfer the funds directly from your traditional account into your new Roth IRA.

While you’ll need to pay taxes on the converted amount now, all future withdrawals are tax-free. The amount you convert will count as income for that year, which could increase your taxes, so plan accordingly. 

As a high-income earner, the best time to convert to a Roth IRA is in a low-income year. This can be after a job change, business loss, or during retirement before you need to start taking Required Minimum Distributions (RMD) at age 73. 

Once RMDs begin, you might explore options to reinvesting Required Minimum Distributions to continue building your retirement funds tax-efficiently. By converting in a lower tax bracket year, you minimize the immediate tax hit. 

You may also consider making the switch as soon as you can to benefit from the advantages of investing early for retirement. 

5. Set up a Donor-Advised Fund

With a donor-advised fund, you can donate to charity and get an immediate tax deduction. This is one of the most effective tax saving strategies. Even when you haven’t decided which charities you’ll donate to, your contribution to the fund reduces your taxable income for the current year. Contributions can be money or assets like stocks or mutual funds.

So, if you’re interested in how to reduce taxable income for high earners, this approach is one of the most effective strategies. Plus, if you donate appreciated assets like stocks, you can avoid paying capital gains taxes on those gains. 

6. Contribute to a Flexible Spending Account

A Flexible Spending Account (FSA) is another effective tax-saving strategy for high-income earners, allowing you to set aside pre-tax dollars to cover healthcare or dependent care expenses. As a result, this reduces your taxable income. For 2024, the contribution limit is $3,050. This means you can save $3,050 before taxes are applied to your income. 

However, unlike an HSA, FSA funds must be used within the same year. Otherwise, you risk losing any remaining balance. 

7. Invest in Companies that Pay Dividends

Unlike regular wages, which are taxed at ordinary income rates, qualified dividends are taxed at the lower capital gains tax rates. The federal tax rate on qualified dividends depends on your income level. 

In 2024, if your taxable income is up to $44,625 for single filers or $89,250 for married couples filing jointly, qualified dividends are taxed at 0%

If your taxable income is between $44,626 and $492,300 for single filers or between $89,251 and $553,830 for married couples, the tax rate is 15%.

If you’re a high-income earner with taxable income above these thresholds, you will pay 20% on qualified dividends. 

This is significantly lower than the top ordinary income tax rate for high earners, which ranges from 24% to 37%. Considering the significant tax benefits, investing in qualified dividends is among the top tax-saving strategies for high-income earners, enabling you to retain more of your investment income.

The dividends must come from U.S. corporations or qualified foreign companies. You must hold the stock for at least 60 days within a 121-day period, starting 60 days before the ex-dividend date.

8. Optimize Real Estate Investments

If you invest in real estate, you can take advantage of depreciation deductions to lower your taxable income, even though real estate is one of the least liquid investments. 

Depreciation allows you to deduct the cost of the property over its useful life, even if the market value is going up. This means that the amount of taxable rental income you report is reduced each year without affecting your actual cash flow.

However, you may be subject to recaptured depreciation taxes if you decide to sell your property one day.  But in the meantime, you will get years of reduced tax liability.

9. Invest in an Opportunity Zone

An Opportunity Zone is created under the Tax Cuts and Jobs Act of 2017 for economic development. By investing in these zones, you can delay paying taxes on capital gains from other investments until you sell the Opportunity Zone investment or until 2026, whichever happens first. 

If you hold the investment for at least ten years, any additional gains made from the Opportunity Zone investment may be tax-free. So, think of this as a long-term strategy.

10. Pay Property Taxes Early

If you’re close to reaching the $10,000 cap on property tax deduction, pay your property taxes early to claim the deduction for the current tax year. Some states or counties also offer discounts or incentives for paying them ahead of time. This means you could save money on the tax bill itself. 

In Orange County, for instance, property owners can receive up to a 4% discount if they pay their property taxes in November, a 3% discount in December, a 2% discount in January, and a 1% discount in February. 

11. Sell Inherited Real Estate

When you inherit real estate or any other investment asset, you can benefit from the stepped-up basis law. The IRS adjusts the value of the property to what it’s worth at the time you inherit it instead of its original purchase price. 

This means if you sell the property soon after inheriting it, you might owe little to no capital gains tax since you’ll be taxed on the increase in value from the time you inherited it, not from when it was first bought. 

For example, if your grandparents bought a property for $100,000 and it’s now worth $600,000, the stepped-up basis resets the value to $600,000 when you inherit it. If you sell the property for $620,000, you’d only pay capital gains tax on the $20,000 increase in value after you inherited it, not the entire gain from the original purchase.

You could also defer paying capital gains by reinvesting the money into another property using a 1031 exchange, as long as you do it within 180 days. Remember, you are just delaying the process here. You’ll still owe taxes if you sell the property in the future unless you do another 1031 exchange. 

12. Fund 529 Plans for Your Children

A 529 plan is a tax-advantaged way to save your children’s education. Even though contributions to these plans don’t reduce your deferral income, they grow tax-deferred. This means you don’t pay taxes on the growth of the investment. Plus, you can withdraw the money completely tax-free for qualified education expenses, such as tuition and books. 

Many states also offer tax deductions or credits for contributions to a 529 plan. In New York, for example, you can deduct up to $5,000 in contributions per year as a single filer, and married couples filing jointly can deduct up to $10,000. 

As a high-income earner, this means you can save for your children’s education while reducing your taxable income by the amount you contribute.

13. Change Your Tax Residency

If you’re a high-income earner who owns multiple properties and lives in a high-tax state like California or New York, consider moving your primary residence to a state with no individual income tax, like:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Make sure you follow state residency rules carefully. High-tax states may still try to claim taxes if they think you haven’t fully cut ties with them. To prove you’ve moved, you’ll need to spend a certain amount of time each year in your new home state and update your driver’s license, voter registration, and mailing address on all official documents. 

14. Claim Business Deductions

If you’re self-employed or own your business, you can deduct many legitimate business expenses from your total income. These include office supplies, rent, utilities, travel, marketing, and employee wages. 

Deducting these day-to-day costs of running your business can reduce your overall tax and end in substantial savings. But remember to keep detailed records of your expenses to claim these deductions. 

15. Utilize the Section 179 Deduction for Business Equipment

With the Section 179 Deduction tax rule, businesses deduct the full price of qualifying equipment and software in the year it was bought. For example, if you purchase new equipment for $15,000, the Section 179 Deduction lets you deduct the full amount from your taxable income. This reduces your taxable income immediately. 

The 2024 limit for Section 179 Deductions is $1.16 million. 

There you have it: 15 simple ways on how to reduce taxable income for high earners and legally lower your tax burden. By implementing these tax planning strategies, you can optimize your taxes and enhance your long-term financial health. Make sure you understand your unique situation to make the right decisions that align with your financial goals.

Disclaimer

It’s always best to work with a tax professional and a financial planner to understand how to pay less taxes while staying compliant with current regulations.