Tax Savings Strategies for High Income Earners

As a CPA and Financial Advisor, I often receive inquiries on tax strategies to reduce taxable income. Being in a high tax bracket with your earnings is great, but not when you receive the tax bill in April! There are a few things to consider to maximize your tax savings, but keep in mind that being an employee or a W-2 wage earner does not come with many tax breaks.

Maximize Income Deferrals

Contributing to your 401k or company retirement plan is an excellent way to maximize retirement savings while possibly reducing your taxable earnings. In your lower earning years, it may be best to consider contributing to a Roth retirement account (if available). It does not give you a current tax break however, the earnings grow tax-free. Once your earned income begins to increase, consider redirecting that income deferral to a traditional 401k. That will give you an immediate tax deduction. In 2024, you can defer up to $23,000 (plus catch up of $7,500 if you’re over 50 years old).

Another way to receive immediate tax relief is to contribute the maximum to a Health Savings Account (HSA). You may have access to this benefit if you participate in a high deductible healthcare plan. For 2024, the contribution limit for a HSA is $4,150 for self-only coverage and $8,300 for family.

Further, some highly compensated employees have access to Deferred Compensation Plans within their organization. The plans allow them to defer earned income to future tax years when their income potentially is lower and receive an immediate tax break. Be sure to work with a financial advisor as there are pros and cons to using this method.

Charitable Contributions

Gifting cash or property to charity is a good way to reduce taxable income.

Efficient Taxable Portfolio

While assets in your retirement accounts are either tax-deferred or tax-free, assets invested in brokerage accounts are taxed each year. Here are a few ways to manage it as tax-free or efficiently as possible:

• Harvesting tax losses throughout the year to offset capital gains. You can also use up to $3,000 of tax losses against ordinary income and carry forward any remaining losses.
• Avoid income-producing assets (such as stocks or ETFs that pay dividends) in these accounts, and look to gain exposure to these assets in retirement accounts.
• For fixed income and cash, look for tax-free holdings from federal, state, and/or local taxes, such as municipal bonds. Make sure to take into consideration the tax-equivalent yield.

Tax Credits

Some states offer tax credits on the state return such as credits for 529 contributions into a plan established in that state, film credits or other local offerings. Keep in mind that high-income earners generally phase out of most tax credits. Work with your CPA to determine if there is anything offered that makes sense for you.

Tax Savings Strategies

For all of the different tax savings strategies mentioned, make sure to consider your long-term goals. The goal is to be more tax efficient, and not necessarily have less growth on your investments or earn less money!

Have questions? Feel free to contact us.