If you’re in the top 1% of income earners, you’re probably all too familiar with being tethered to a tax calculator, as well as the concept of tax-advantaged savings.
But what if you want to maximize your benefits while keeping your taxable income low?
Tax Saving Strategies For High-Income Earners
This guide will discuss strategies high-income earners can use to save more and reduce their taxable income.
1. Health Savings Account (HSA)
A health savings account, or HSA, allows you to set aside funds pre-tax and use them for future medical expenses.
The funds saved in this account remain untaxed if you use them for qualified health care expenses.
Any earnings generated from investing the funds are tax-free, and the maximum annual contribution limit is $3,500 ($6,650 for those over 50).
Suppose you’re an employee on a high-deductible health plan through your employer and qualify for an HSA deduction. This will reduce your taxable income by reducing how much income your employer reports on your W2 form.
HSAs are an excellent way to save for future medical expenses, but remember that you can only use the funds in your HSA for other legitimate medical costs.
Things like over-the-counter medications, maternity clothes, or elective cosmetic procedures do not apply.
2. Individual Retirement Account (IRA)
An Individual Retirement Account (IRA) helps you with your retirement saving goals without worrying about future tax rates.
This works by reducing the Adjusted Gross Income (AGI) during the contribution year, meaning there is less taxable income.
With future withdrawals after retirement, the money is not taxed as it has already been paid out.
When choosing IRA providers, opt for a reputable financial or banking institution. For example, with SoFi IRA, you can save for retirement in an account that helps you manage your finances by providing financial peace of mind and security.
NOTE: As of 2023, the IRS places an IRA contribution limit of $6,500 and an additional $1,000 for taxpayers over 50 years. However, you can also make Roth IRA contributions.
This differs from the regular IRA, allowing you to withdraw your contributions without paying any taxes or penalties.
The distinction between the two IRA types is that with the Roth IRA, you pay tax on your contributions as you make them.
3. Setting Up An LLC
If you are self-employed and have considered incorporating your business, now is the time to do it.
By setting up an LLC, you legally separate your assets from the business assets, which can help protect you in case of legal issues. As a member of an LLC, you can run your tax-deductible business expenses through it.
Some of the benefits of an LLC include personal liability protection; some LLC structures also offer limited liability protection not afforded by corporations or partnerships.
Tax-wise, an LLC:
4. Charitable contributions
Charitable contributions are a great way to reduce your tax burden. For charitable contributions to be tax deductible, they must be to a qualified charity.
Your deduction amount depends on how much money you donate, but it can be as high as 60% of your adjusted gross income (AGI).
This percentage changes depending on the organization, so you must check with them before donating.
You’ll want to maximize this benefit by making every contribution during the same year since deductions all count towards one year’s maximum limit.
If you’re an active donor, this is even easier. You can set up recurring donations and let the charity do the work. This way, you never have to worry about missing a contribution or reducing your tax deductions.
Pro Tip: High-income earners should regularly review their paystubs to closely monitor their taxes.
By staying informed about the amount of taxes being withheld and comparing it to their expected tax liability, they can make necessary adjustments to ensure they are not underpaying or overpaying taxes, optimizing their financial planning and avoiding potential surprises during tax season.
Being a high-income earner does not mean you have to bear the burden of high taxes. You earn more, but you can do plenty to reduce your tax burden.
By taking advantage of the effective tax-saving strategies we have discussed, you can at least avoid giving too much of your income to the tax man.
That way, even if you don’t get a tax refund, you won’t be paying more than is strictly necessary to the federal government.