5 Important Tax Strategies for High-Income Earners
It is no doubt that having a big chunk of your earning being slashed out for taxes is the most frustrating things. High-income earners are the taxed more than their low income earning counterparts. However, the there are multiple strategies to reduce taxes that the blog aims to explore in the following section. To make significant fortune by saving maximum amount of your income it is essential to understand the key strategies to reduce income taxes. It is based on how you manage your financial activities such as income, investment, spending and savings. Here are some tax strategies for high-income earners.
How to Minimize Taxes for High-Income Earners
In the USA the IRS-Internal Revenue Service considers anyone who reportedly claims their earning to be $200,000 or more as on tax return as high-income earners. The income shown during tax return is the net income earned from all the sources. So, individual earning more than $200,000 has got to do a lot to bypass high tax payments. Here are some useful tax strategies for high-income earners.
1. Increase Retirement Contributions
The amount that you save for retirement during service period is non-taxable according to IRS. As a result, if you contribute a good chunk of your income in the retirement account your income level that you would show during tax filing would significantly come down. Every dollar that you contribute in your retirement account would reduce your tax.
You will be able to show less income than the actual income and you will be taxed on the remaining amount you will show as your income. However, there are some limitations on how mush amount from your income can you contribute in the retirement account.
According to the latest rule of 2024, a high-income earner can contribute according to your age and income. For instance, in 2024 a high income earner can contribute up to $23,000 to a traditional 401K while employed and $30,500 after age 50 years.
2. Invest in Health Savings Account
Investing or contributing to a health savings account can also reduce your taxable income up to a considerable level. For instance, in 2024, you can contribute $4,105 for individual health and $8,300 for families. Additionally, individual over the age of 50 can contribute an extra $1000. The amount of money you contribute in health savings account must be used for qualified health expenses to obtain a tax free health services. However, during inflation the amount you contribute goes up but the medical costs normally exceeds the speed of inflation.
3. Postpone Receiving Income Compensation
This tactics of deferred compensation is beneficial in multiple ways. You can postpone receiving a portion of your income when you are in the higher taxable income slabs. This not only enables you to reduce your net tax payments on your earnings by showing lower income but also help you to save money for the future when you might not continue in the high income slabs.
However, there are some risks involved with deferred income. If your company goes bankrupt due to- any reason there will be a high chance that you will lose all the income that you deserve as deferred payments. So, it is essential to make robust financial analysis and decide accordingly. You can also take the help of experienced Atlanta tax preparer, who can guide you through these tricky planning.
4. Increase Individual Deductions
There are two ways to file for a tax deduction. One is standard tax deduction which counts your tax on the total income. On the other hand, you can itemize your taxes. For instance, if you have multiple taxable investment or expenses such as medical bills, charitable activities, mortgage loans and so on. Claiming tax deduction on each of these individual expenses will reduce your taxable income more than going by the standard deduction. However, you need to calculate whether the tax reduction on itemized categories adds up to more than the standard deduction. To do this calculation accurately it is beneficial to take the help of a professional tax planner, who possess the experience and expertise to calculate accurately and provide key insights.
5. Enhance Your Charitable Contributions
Increasing charitable contributions is also a useful way to reduce tax payments for high-income earners. It falls under itemized tax deduction. You must choose either donor advised funds or private foundations to make your charitable contributions.
Endnotes
The blog has discussed some key tax strategies for high-income earners. Hope this proves useful for you. However, before following these strategies, it is important to take advice from professional tax planners. They will be able to analyze your financial situation and offers the best insights to optimize your tax deductions.
