High income earners are usually experts in their field, and have spent many years building their career to achieve success. They should be able to enjoy it without worrying about complex and ever-changing federal tax laws or limiting their future prosperity.
If you are a high income earner, and you want to continue to grow your wealth while meeting your tax obligations, the following tax strategies for high income earners will help. Using the expertise of the TPI Group, you’ll be able to reduce your income taxes and find ways to let your money do some of the heavy lifting for you.
Gifts and donations to charitable organizations are one of the most common tax reduction strategies for high-income earners because they create a win-win situation for all involved. Charities get additional resources to help carry out their mission, while contributors reduce their taxable income and, ultimately, pay less federal income tax. And those tax savings can be quite significant – up to 60% of gross adjusted income.
But many high income earners, even those who are in the habit of regularly donating to charities, don’t realize the full potential of this taxable income reduction strategy. Instead of simply writing cheques to reduce your tax burden, there are better ways.
Consider establishing a donor advised fund or making your next donation with securities, instead of cash. Want to know more about this subject? Contact us today for a no-obligation review of your taxes.
Donor Advised Funds
A donor advised fund can be easily established through a bank or brokerage firm, with a minimum contribution ranging from $5,000 to $25,000, depending on where you set up the fund. These funds allow high income individuals far greater control over their contribution deductions.
In practice, donor advised funds are best understood as investment accounts that manage your charitable contributions. They allow you (the trustee) to lump current and future donations together and deduct them all at once. Alternatively, you can make a large contribution to your fund, make the corresponding deduction from this year’s tax bill and then donate the money as you see fit over time.
Charitable donations in the form of securities, such as stocks, bonds, treasury bills and mutual funds, can create a deduction of up to 30% from your adjusted gross income each year. And they offer other interesting sources of value. Donors do not have to pay capital gains tax on appreciated long-term stocks, and they get to deduct the full market value of the stocks at the time of donation.
If, for example, you acquired $5,000 worth of a particular stock in 2016 that is now worth $12,500, you could give that stock to a charitable organization and claim it in full without having to pay capital gains tax on the additional $7,500 in value. Basically, donations in the form of securities allow contributors to reduce two different tax obligations at the same time.
Invest in Your Health
Even if you already have great health insurance coverage, you should consider opening a health savings account. Health savings account contributions are completely tax deductible, up to $3,600 per person per year (in 2021), and people over the age of 55 can contribute up to $4,600 annually.
On top of the contribution deductions, a health savings account offers other interesting advantages. Withdrawals for qualified medical expenses are not taxed, and any interest income your funds generate in the account are tax exempt, so your money grows tax free.
But, most importantly, health savings account funds can be completely withdrawn when you reach the age of 65 without penalty, so this tax reduction strategy can also serve to stash away a nest egg for your golden years.
Mind Your Mortgage
Homeowners can deduct mortgage interest expenses paid on up to $750,000 of a mortgage’s principal from their taxable income. The only caveat is that with this type of itemized deduction, you must give up the standard tax deduction, which is rarely a factor for high income individuals who own real estate.
If you are looking for a way to greatly reduce your next tax bill, consider purchasing a home (if you haven’t already) or look into your cash-out refinancing options.
Build Your Retirement Accounts
One of the most effective tax reduction strategies for high earners is to maximize their retirement savings. Retirement plans offer a lot of flexibility because you can invest your money as you see fit, and you have the freedom to contribute varying amounts from year to year.
Any contributions you make to tax-qualified retirement accounts (with the exception of a Roth IRA or a Roth 401K) are tax deductible, and you will not have to pay taxes on investment earnings from these accounts until they are withdrawn. The annual contribution limits vary depending on your type of retirement account, such as a traditional IRA, an employee-sponsored or individual 401(k) or simplified employee pension (SEP), so speak to your accountant for specific advice.
Start a Business
Formalized business structures have tremendous tax advantages for high income individuals. Even if you don’t intend on going into a new line of business, setting up a limited liability corporation (LLC) to handle your personal investments or manage assets, such as an investment property, can make a huge difference when it comes time to file.
Income deductible business expenses offer one route for tax savings, while other deductions, such as the qualified business income deduction, could allow you to deduct up to 20% of your profits.
If you don’t already have an LLC in place, speak to an expert to learn more about the deductions that are permitted for the type of business structure you want to establish.
Tax Strategies for High Income Earners from TPI Group
At TPI Group, our team of experts works to devise novel tax planning strategies that help high income earners retain a greater share of the wealth they generate.
There are many legal and ethical ways to minimize your tax burden that you might not be using, so contact us today for a no-obligation review of your taxes.