10 Tax Planning Strategies for High Income Earners
High-income earners find that their tax bill can sometimes be outrageous at the end of the year, sacrificing earnings with little to show for it. The good news is that you can combat some of these unexpected expenses with a few savvy moves. What do you need to know about tax planning for high-income earners?
These ten tips will help you to keep more money in your pocket and maximize your earnings.
1. Defer Income
While not always possible, some companies offer a deferred compensation plan that allows you to shift funds around and effectively lower your annual income.
This can be a savvy move if a extra income will ultimately push you into a higher tax bracket, forcing you to pay more to the IRS at the end of the year. Instead, you can defer your income until a year when you find yourself in a lower tax bracket.
Keep in mind that there are always risks associated with deferring your income. For example, you may not have a guarantee that the funds you defer will be paid to you if the company goes out of business. Make sure you feel confident of the company’s longevity before electing to enroll in a DCP.
2. Know Your Vesting Schedule
For those who have restricted stock units (RSUs) as part of their compensation plan, make sure you know exactly when those units will vest. This often happens on a tiered schedule over your first few years employed for the company. Some people may elect to hold onto them in hopes of appreciation, but this will cause you to incur capital gains tax on their sale.
Instead, you can sell them as soon as they vest. Because they will not have time to lose or gain value, you can avoid capital gains tax with a speedy sale.
3. Make HSA Contributions
One of the most significant benefits that you can employ as a high-income earner is to use a Health Savings Account (HSA). All contributions made to this type of account are tax-deductible, but that isn’t all. They will also grow tax-deferred until you actually utilize the funds to cover any qualified medical expenses.
And finally, as long as you use the funds for qualified medical expenses, even the distributions will be tax-free.
In a nutshell, that means that contributions are tax-deductible and grow tax-deferred, and are tax-free when used for the right expenses. This is the only triple tax advantaged account out there!
4. Tax-Loss Harvesting
Another way to manage taxes for high-income earners is through tax-loss harvesting. If you sold an asset that would have been subject to capital gains taxes, you can offset that by selling another asset at a loss. You can apply losses to offset gains, and if you have losses leftover, you can write off up to $3,000 from your income at the end of the year.
Of course, you may choose to invest in another similar asset after the sale but you must stick to the wash sale rule. This dictates that you cannot purchase the same investment or a substantially similar one within thirty days of either side of the sale date (sixty days in total).
5. Make Retirement Plan Contributions
Spend your golden years without having to worry about your finances by investing in your future right now. Plus, you will get some nice benefits that you can use for tax planning, especially as a high-income earner.
A 401(k) is a great vehicle for maximizing tax savings, especially if you qualify for those extra catch-up contributions if you turn age 50 this year or are older. If you work for any of these tech companies, here are some guides for maximizing your 401(k):
6. Hire Your Kids
For business owners who want to help their family, they can strategically hire their children to do small tasks around the company.
Your child’s wages can be a tax write off, effectively allowing you to shift part of your business income from your tax bracket to your child’s much lower tax bracket. In other words, you will not bear the tax burden for their salary. Plus, you typically won’t have to pay Social Security and Medicare taxes for kids who are under eighteen.
That said, there are certain limitations. For example, you must pay the child a reasonable amount. Even though you may be tempted to pay a higher wage and get a higher tax write off for the business, paying $400/hour to your child for fulfilling orders or stuffing envelopes is sure to raise red flags.
Hiring your kids also comes with another benefit: by letting them earn and experiment with their own money, you can help raise them to be financially literate and make better decisions with money down the road.
7. Maximize Non-Taxable Income
Make sure that not all of your income will be taxed, especially not later in life, so you may want to leverage some of these strategies. Non-taxable income can include income from a Roth IRA or certain withdrawals from life insurance contracts. If you make too much money to fund a Roth IRA, consider a backdoor Roth IRA but make sure to understand the rules first.
One little known strategy for business owners is the “Augusta Rule”, which lets you rent out your home to your company, tax-free, for 14 days throughout the year. You can rent out property, including your home or a vacation home, and earn income tax-free for that time period.
8. Contribute to a 529 Plan
If you want to help your kids cover their education expenses, a 529 plan is a tax savvy way to do just that. You can take the annual gift tax exclusion of up to $17,000 in 2023 ($34,000 for married couples).
Using this strategy, you can fund up to five years’ worth of contributions in a single year, leveraging your final tax deduction in a year where you earned abundantly more than you anticipated. That’s $170,000 that you could fund into a 529 plan without eating into your lifetime gift exemption!
This won’t help you with taxes today, because contributions aren’t federally tax deductible (but are state income tax deductible in some states!), but earnings and future withdrawals are tax-free which helps a lot later on when college starts.
Keep in mind that you can have more than one 529 plan if you have multiple children, or you can change the beneficiary on the account as your children graduate from college one by one. We generally recommend having one plan per beneficiary (per child) vs planning to use a single plan for all of your kids.
9. Maximize Deductions
High-income earners who are trying to plan for their taxes need to maximize their tax deductions to avoid paying according to a higher income bracket.
Some of the deductions that you may want to utilize include medical expenses, mortgage interest, and even property taxes. Self-employed individuals may be able to take advantage of many more opportunities, including home office, vehicle, and equipment write-offs. Every deduction that you take reduces your tax liability, usually dollar for dollar.
Charitable donations in particular offer a multitude of powerful tax deduction opportunities – enough that charitable contributions deserve a dedicated section, which we’ll cover next.
10. Make Charitable Donations
Charitable donations are an excellent way to give back while lowering your tax liability at the end of the year. There are multiple avenues that you can explore to achieve this, including donating low-basis shares, contributing to a donor-advised fund, or selling property in a charitable remainder trust (CRT).
The first strategy is to donate low-basis shares directly to a 501(c)(3) charity. To do this, you can directly donate your stocks to the charity at their fair market value. You receive this value as a deduction on your taxes and the charity can sell those shares at fair market value without having to pay taxes on the profits.
A donor-advised fund is also a great option if you want to donate a huge amount to charity and spread it out over the coming years. To do this, you can make one large donation in the year when you are subject to higher income tax rates and give it out steadily over time. This strategy is known as “bunching” and it may allow you to take a larger charitable deduction in one year, and then take the standard deduction in the next. Alternating can lead to paying less taxes compared to making smaller charitable contributions each year.
You can also sell property within a charitable remainder trust (CRT). Property can include real estate, but it can also include antiques, memorabilia, and more. By selling it within the CRT, you can avoid the capital gains tax and ensure more of your investment goes toward funding the trust. The donation made can then be transformed into income later in life for you, your beneficiaries, and a charity of your choosing.
Experience the Financial Confidence You Deserve
High-income earners often have a more complex financial portfolio, which can leave you wondering how best to strategically manage your assets. Luckily, a more complex financial portfolio tends to also create more tax planning opportunities, allowing you to keep more of your hard-earned money.
Are you ready to start making the most of your tax deductions as a high-income earner? It might be time to consult with the professionals at Consilio Wealth Advisors. We offer financial planning for tech professionals so you can have confidence in your financial future. Schedule a consultation call with us today to learn more!
We talked about a lot of tax stuff in this post! We’d like to remind you to check with your CPA, tax professional, or qualified financial planner, before implementing any of the strategies mentioned above. Your situation is unique and understanding how each of these tips applies to you is critical!
DISCLOSURES:
This article is not designed to be tax or financial advice. Please contact your tax advisor or CPA to determine if any of these strategies are applicable to your situation. Consilio Wealth Advisors, LLC and its advisors are not CPAs or tax professionals.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Consilio Wealth Advisors, LLC (“CWA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where CWA and its representatives are properly licensed or exempt from licensure.
