High earners are often burdened by heavy taxes due to unawareness, incompliance with state-imposed tax laws and regulations, and, above all, inadequate planning.
As one of them, if you want to optimize your financial strategy, reduce your overall tax burden, and build wealth, smart tax planning is more than essential.
Not sure what strategies would work best? No need to look elsewhere. Five most effective tax planning strategies for high income earners are outlined below…
Let’s review each of them in detail…
Maximize Contributions to Retirement Accounts
High earners can significantly reduce their taxable income. Wondering how? The best way is to contribute the maximum allowable amount to retirement accounts, such as 401(ks) and IRAs.
In 2023, individuals can contribute up to $22,500 to a 401(k), with an additional catch-up contribution of $7,500 for those aged 50 and older.
Additionally, traditional IRAs allow for tax-deductible contributions. However, income limits apply for high earners.
This underscores the need to know the tax implications of both traditional and Roth accounts. That way, they can better optimize their long-term tax strategy.
Utilize Health Savings Accounts (HSAs)
Let’s say you have a high-deductible health plan. In that case, an HSA can be a powerful tool. The amount you contribute frequently to an HSA is tax-deductible, and your funds grow tax-free.
Not just that, withdrawals for qualified medical expenses are also tax-free. HSAs can work as an additional retirement vehicle.
That’s what allows the unused funds to accumulate for future medical expenses or even be withdrawn in retirement without penalty.
Implement Tax-Loss Harvesting
If you have investment portfolios, tax-loss harvesting is worth implementing. Don’t know what it is? It’s all about selling underperforming investments to offset capital gains realized on other investments.
Suppose you create a more tax-efficient investment strategy while maintaining a well-balanced portfolio. This can help reduce your overall taxable income.
Consider Donor-Advised Funds (DAFs)
Being a high earner, if you’re looking to make charitable contributions, establishing a donor-advised fund is a sure way to donate appreciated stocks or other assets to charity. In return, you will receive an immediate tax deduction.
To maximize your itemized deductions and reduce your taxable income that year, it’s advisable to “bunch” several years’ worth of charitable contributions into one year.
Explore Real Estate Investment Opportunities
Investing in real estate comes with several tax benefits that high earners (including you) can leverage. The most compelling benefits include:
- mortgage interest deductions,
- property tax deductions, and
- depreciation.
They all work wonders at reducing taxable income. Beyond that, investors can explore 1031 exchanges to defer capital gains taxes on the sale of investment properties by reinvesting the proceeds into similar properties.
This approach, when taken proactively, will help you maintain your investment portfolio while minimizing long-term tax liabilities.
Source: FG Newswire