High-Income Earner Tax Reduction Strategies

Higher-income earners pay a significantly higher percentage of their income to the IRS than lower-wage earners. If your work or assets generate significant income, you could pay up to half of your earnings to the U.S. government. According to the IRS, high-income earners pay almost 70% of the total federal income tax they collect. Fortunately, there are several tax reduction strategies to reduce tax payments.

Explore Methods to Reduce Your Income Tax Liability with a Centennial Wealth Advisor

The federal government creates programs for high-income earners to reduce tax liabilities. With careful planning, good financial management decisions always consider the tax implications.

Everyone should learn how to reduce their own taxes, regardless of income level, but high earners cannot use many of the most common tax breaks. These tax-savings phase out for individuals earning over an income cap, but legal tax reduction strategies still exist.

Every taxpayer’s financial situation is different. Not every strategy applies to any given situation. The complexity for high-income earners comes when plan max out, so you must consider more than one option.

These tax planning strategy options might help you legally reduce your taxable income taxes.  

Contributions to Retirement Accounts

Deductions for retirement account contributions mostly don’t have income limits. But this won’t apply if your spouse has access to their own 401(k) or other government-sponsored retirement plan and contributes to their own IRA. If that’s the case, as the high-income earner, you don’t get a tax break on the IRA, just on the 401(k).

As a business owner, you can bypass IRS deduction limits by opening a SEP-IRA. You make contributions as if you are your own employer. Then, the business also writes off the entire contribution amount as a business expense.

Mortgage Interest Deductions

Mortgage interest deductions are one of the most popular tax breaks for taxpayers at all income levels. The deduction applies to debt for home purchases, building, or substantial improvements. The tax break applies to every home you own: your first home, your summer home and even a third.

The IRS allows mortgage interest deductions for any level of income. But there was a recent cap placed on new mortgages. A new mortgage cannot exceed $750,000. But, there is no cap for your existing mortgages.

So, high-income earners find collecting several properties, and carrying mortgages less than $750,000, offers tax advantages.

Charitable Donations

When you donate to verified charitable organizations, you itemize the value of the contributions as deductions. There is not an income limit to charitable donation deductions. But you cannot deduct more than 60% of your adjusted gross income (AGI). Charitable donations are an excellent way for you to reduce your income tax liability.

Long-Term Capital Gains

You pay tax on short-term capital gains at your marginal income tax rate. This is money earned when you sell investments less than a year after you purchase it.

On the other hand, long-term capital gains tax rates are less than 20%. When you are in the top bracket, you save about 50% by holding onto investments for over a year.

Tax planning to locate opportunities to reduce your income taxes legally keeps more of your money in your pocket. A professional Centennial wealth advisor presents you with opportunities, so you can choose how to maximize your tax deductions.