what actions can be taken now to reduce their overall tax burden
This post was originally published May 27, 2020, and extensively updated When you earn a high income, you tend to pay a college percentage of taxes than average earners. In that location are exceptions, of course, but in full general, people who earn more pay more. And, if you're a high earner, you might recollect you have no choice -- that you must resign yourself to bearing a high revenue enhancement burden. Just is that really the instance? The brusque answer is no. At Cook Martin Poulson, we spend a lot of time discussing and working on proactive taxation planning with our clients, including those who have sizable incomes. In fact, i of the well-nigh common questions we hear is this: The more money y'all brand, the more complicated your taxes are going to be. Then, if you have a higher income than near people, it'due south important to work with a skilled auditor to figure out how to reduce the amount of income taxes yous pay. In addition to taking your standard deduction and other deductions, at that place are many things you can do to lower the amount yous pay. Here are some of our favorite income taxation reduction strategies for high earners. Let'due south starting time with an overview of tax rules for loftier-income earners. For the sake of this mail, we consider anybody in the peak iii tax brackets as a loftier-income earner. That ways that if you earn more than $170,050 in gross income as a single earner and $340,100 if you are married and filing jointly, you are a high-income earner. The SECURE Deed, which became police at the end of 2019, includes several provisions that apply to high-income earners. They include: These changes are meaning because they make it possible for high-income earners to make additional contributions to a retirement plan during the tax year. Ane way to reduce your tax burden is to change the character of your income. If you're wondering why you should do so, here are some of the ways it can help you lot to lower your revenue enhancement bill. The skillful news is that with a combination of revenue enhancement deductions, tax credits, and contribution strategies, you tin reduce your tax bill by reducing your taxable income. Here are nine ways to accomplish your goal and reduce your taxation pecker: Allow's start with retirement accounts. Employer-based accounts such as 401(thousand) and 403(b) accounts permit you to lower your taxable income hands. That's because every dollar you put into these accounts is not taxed until you withdraw the coin from your account -- and that reduces your tax burden each year you lot contribute. The benefit here is that if you expect until you accept retired to withdraw coin from your 401(k), your income will be lower considering you will no longer be drawing a salary. The result? You volition be in a lower tax bracket. This means that the money you withdraw volition be taxed at a much lower rate than it would have been if you would have had to pay taxes when you earned it. You tin take advantage of the tax-reducing benefits of retirement accounts by contributing the maximum corporeality. For 2021, the maximum 401(one thousand) contribution is $19,500 and the maximum 403(b) contribution is the aforementioned, while the maximum contribution for Simple IRAs is $13,500. Go along in mind that if yous are over the age of 50, you lot may accept reward of catch-upwardly contributions of upwardly to $half dozen,500, as well. Roth IRAs are tax-gratis retirement accounts that can help you lot to reduce your tax burden and save money on your taxes, even if y'all are in i of the elevation brackets. Dissimilar a traditional IRA, Roth IRA contributions are made from post-tax income. That means you lot will pay taxes before you contribute, just non when you withdraw. That might not seem like an advantage, but it is. Whatsoever income earned on the money in your Roth IRA is also tax-free. Y'all tin even roll over the money in a traditional IRA or a 401(k) into a Roth IRA and reap the same benefits. Some of the best times to do a Roth IRA conversion are when yous accept had a year with less income than the previous yr, or when y'all have retired and are temporarily in a lower tax bracket. This strategy makes sense if you can wait until the historic period of 72 to make mandatory withdrawals. We similar to advise this option to our clients because it is easy to overlook, especially when people are focused on tax deductions as a fashion of reducing their taxable income. Municipal bonds might not be the most glamorous investment, but we often recommend revenue enhancement-exempt bonds to our high-income clients. When you purchase a municipal bond, you lend money to the issuer in exchange for set interest payments throughout the bond. At the end of the period, the bail is mature, and the original investment is returned to the buyer. The income from taxation-exempt bonds is usually exempt from all income taxes, including federal, land, and local taxes. Fifty-fifty the interest payments from the income may be exempt from taxes. Of course, municipal bonds usually earn less income than other taxable bonds, merely they tin withal be a worthwhile strategy for reducing your tax burden. You tin decide whether they are worth it by calculating the bond'due south taxation-equivalent yield. If you take inherited real manor from a parent or someone else, you may non realize that you can save money on property taxes by selling the existent manor speedily. Hither's why: Let'southward say your parents bought a home for $200,000 and information technology is now worth $900,000. If they had sold it while they were live, they would take paid capital gains of $700,000. If you hold onto the house, you lot volition accept a stepped-upwardly tax basis of $900,000 and will be required to pay property taxes on that corporeality, thus significantly limiting your potential gain from the auction. The goal is to minimize your capital gains tax liability. The culling is to sell the home apace after you inherit it, thus saving coin on belongings taxes and maximizing your inheritance. Of class, you should also know that you tin avoid capital gains taxation by rolling the income from the sale into another real estate investment within 180 days (1031 exchange) . Yous already know that donating money to clemency offers the opportunity for a tax deduction in the year the donation is made. What you may not know is that you can get a deduction this year for several years' worth of contributions if y'all set upwardly a donor-advised fund. A donor-advised fund is a charitable fund that you lot can fix that allows you to decide how and when to allocate funds to individual charities. You can make contributions this year and take the full tax deductions this twelvemonth on your tax render, thus reducing your revenue enhancement bill. And so, going frontward, you can decide how much money to donate per year and where to donate it. In short, you lot receive the taxation deduction when you fund the donor-advised fund. We ofttimes recommend this strategy to our loftier-income clients, particularly if they take a yr with higher-than-normal income due to an inheritance or windfall. Information technology is a clever way to use charitable deductions to your advantage. You may also cull to contribute some income to a Health Savings Account (HSA) to salvage on your taxes. You may contribute but if you accept selected a loftier-deductible insurance program. For 2021, the maximum contributions are: Yous may contribute an additional $1,000 if you are 55 or older. HSA contribution limits are linked to inflation, even though cost increases for medical expenses typically outpace inflation every yr. Y'all tin can use the money in your HSA for medical and dental expenses as well as related costs, such as over-the-counter medications and first aid supplies. If you withdraw money and utilize information technology for not-qualified expenses, and then you volition pay tax on your withdrawals. Yous should know that the money in your HSA is yours forever, unlike the money y'all contribute to a Flexible Spending Account, which must be spent during the tax yr. For that reason, you may desire to consider an HSA. Yous will need to weigh the risks of having a higher deductible against your potential savings. The income that you earn from your task is taxed at ordinary income rates and the result is that you pay a high tax rate if y'all are a high earner. You may know that uppercase gains are taxed at a lower rate, meaning that there are tax benefits to earning capital gains. Ane style to do that is past investing in companies that pay qualified dividends. Information technology is important to understand that ordinary dividends are taxed every bit ordinary income. To reap the taxation advantages of dividend income, you volition demand to invest in companies that pay qualified dividends, which must be issued by a United States company or a qualifying foreign company. You can find information near which companies are not considered to be qualified on folio 20 of IRS Publication 550 . If you take previously invested in companies that pay dividends, those dividends volition be reported to you lot on Form 1099-DIV. Qualified dividend payments appear in Box 1b. Ordinary dividends volition appear in Box 1a. The maximum federal tax rate for qualified dividends is twenty%. One tax planning strategy to consider if you own properties in multiple states is tax residency planning. This is a strategy that requires careful planning and attending to particular and is best done with an experienced tax auditor. Income tax rates vary from country to land. Some states accept high rates while others have no country income tax at all. These states include: If you own property in one of these states, you may want to consider establishing your primary residence there. Withal, you should exist aware that some states aggressively pursue high earners if they earn coin in the state or effort to work around paying income taxes. You lot should besides exist enlightened that some states with low or no income tax charge college rates for other things. Working with a professional auditor to determine individual land residency requirements volition help y'all decide if this is the right strategy for you. As of this writing, IRS rules limit the property revenue enhancement deduction to $10,000 per twelvemonth thanks to the Tax Cuts and Jobs Human action of 2017. There was an try to repeal the limit in 2019, but it failed. That means the maximum yous can deduct for state and local property taxes in whatever 1 taxation year is $x,000. It may be worthwhile to pay taxes early on if you lot oasis't already reached the maximum. Some states and counties offer discounts for paying early, then you can save money on the front end as well. The well-nigh important thing to know is that the tax debt must be paid for y'all to deduct it from your federal taxes. You should consult with an accountant to make up one's mind whether this option is an effective tax strategy for yous as a high earner. In tardily Oct of 2021, President Joe Biden submitted a $one.75 trillion social and climate spending plan that would get near of its funding -- approximately $1 trillion from taxing the wealthiest Americans. Hither are some of the cardinal points that apply to high earners: If you want to save on taxes, at that place are a number of things y'all should know. The laissez passer-through deduction is one choice that can help with this. From these provisions, the Biden Administration plans to finance its spending by taxing the wealthiest Americans. While it remains to be seen whether Biden has the votes to enact his plan, it is notwithstanding necessary for high earners to take steps immediately to minimize their income tax burden earlier the new rules go into effect. Being a high earner doesn't necessarily mean that you lot can't save money on your income taxes. The 9 strategies we accept outlined here tin help yous observe means to reduce your tax pecker. The best way to identify tax incentives and strategies is to work with a CPA who understands the revenue enhancement code and all its implications. Need help determining the best tax reduction strategies to lower your tax bill? As a high earner, yous may dabble in nontraditional investment methods such as cryptocurrency. If so, be sure to check out our post:
December 17, 2021. What'south the all-time way to reduce taxable income ?
Overview of Taxation Rules for High-Income Earners
Revenue enhancement Saving Strategies for High-Income Earners: Change the Character of Your Income
The overall benefit of irresolute the character of your income is that it can reduce your MAGI for each tax year and let you to accept advantage of a lower tax bracket in some cases.ane. Max Out Your Retirement Contributions
2. Roth IRA Conversions
3. Buy Municipal Bonds
four. Sell Inherited Real Estate
5. Set Up a Donor-Advised Fund
half-dozen. Use a Health Savings Account
7. Invest in Companies that Pay Dividends
8. Taxation Residency Planning
9. Pay Your Holding Taxes Early on
How President Biden's Proposed Revenue enhancement Plan Would Bear on Loftier Earners
Reduce High Income Earners' Taxable Income with Smart Tax Planning
TAXATION OF CRYPTOCURRENCY: IS THE Sale OR EXCHANGE OF BITCOIN OR OTHER CRYPTOCURRENCY TAXABLE?
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