Do you want to reduce your taxes? Of course you do.
If you’re in a high tax bracket, you’ll be happy to know that there are numerous tax reduction strategies for high-income earners. However, you need to be diligent in pursuing them or consult with a financial advisor who can guide you effectively.
Tax laws change frequently, and their increasing complexity can make it challenging for high-income earners and high-net-worth individuals to stay current with the latest tax strategies.
Even with a free cheat sheet to guide you, keeping up with the latest tax rules can be overwhelming.
Since 2017, there have been several significant overhauls of tax legislation:
The Tax Cuts and Jobs Act of 2017 was the largest overhaul of the tax code in a generation. This legislation made adjustments to income tax rates for many individual tax brackets.
In December 2019, additional tax legislation was passed, including the SECURE Act and Taxpayer Certainty and Disaster Tax Relief Act of 2019.
In December 2022, Congress passed the SECURE Act 2.0, which introduced numerous changes affecting retirement planning and tax strategies.
It's important to note that some tax changes from the 2017 Act are temporary and are set to expire after 2025 unless extended by future legislation.
One significant change was the increase in the standard deduction. For 2024, the standard deduction is $14,600 for individuals and $29,200 for joint filers. This higher standard deduction can make it more challenging for some high-income earners to find enough deductions to itemize.
These pieces of legislation have significantly altered the tax landscape. So, how can you leverage these new tax laws, and what tax reduction strategies remain available for high-income earners?
One effective approach is to consult with a tax-savvy financial advisor. Consider a free retirement assessment to help you navigate these complex tax strategies.
Let's delve deeper into the details and explore some specific strategies that can help high-income earners like you optimize your tax situation in 2024 and beyond.
Tax Basics and New Tax Legislation
Before we get into the tax reduction strategies, it’s important that you understand the basics of taxes, starting with tax brackets.
Your federal tax bracket is the percentage of tax that you owe the IRS on each tier of your taxable income; not to be confused with adjusted gross income. Generally speaking, adjusted gross income (AGI) is an individual's total gross income minus above the line deductions allowed by the IRS.
Conversely, taxable income is adjusted gross income minus allowances for personal exemptions and itemized deductions, also known as below the line deductions.
Once you know your taxable income, you can use the chart below to determine your federal tax bracket. High-income earners should always know how the next dollar of earned income will be taxed.
In 2023, federal tax rates fell into the following categories depending upon your taxable income.
For 2024, federal tax rate income thresholds increase, thus automatically decreasing the taxation of income for high-income earners.
Tax rates on capital gains and dividends
Here are the tax rates on capital gains and dividends for 2023.
The tax rates on capital gains and dividends stayed the same for 2024, but the income thresholds went up slightly just as they did in 2023.
If you are curious, here's how to reduce capital gains tax on stocks and how the capital gains tax is calculated.
The SECURE Act
The SECURE Act, passed in December 2019, and its follow-up legislation, SECURE 2.0, passed in December 2022, include several provisions that affect your retirement planning and tax strategies. These acts introduced key changes that impact tax reduction strategies for high-income earners.
Important numbers and changes for 2024 include:
The age for Required Minimum Distributions (RMDs) increased to 73 in 2023 and will increase to 75 in 2033. This change gives your retirement savings more time to grow tax-deferred.
There is no longer an age limit for contributions to a Traditional IRA, allowing older workers to continue saving in these accounts.
Annual contribution limits for 2024:
401(k)/403(b) plans: $23,000
SIMPLE IRAs: $16,000
Traditional and Roth IRAs: $7,000
Catch-up contributions: $7,500 for 401(k)/403(b) plans, $3,500 for SIMPLE IRAs, and $1,000 for Traditional and Roth IRAs.
The income ceiling for Roth IRAs has increased. For 2024, contributions phase out at:
$146,000 - $161,000 modified adjusted gross income (MAGI) for singles
$230,000 - $240,000 for married couples filing jointly The phaseout zone for deducting traditional IRA contributions for an uncovered spouse has also increased to $230,000 - $240,000.
The Social Security wage base for 2024 is $168,600. This is the maximum amount of income subject to Social Security tax.
The limits on deducting long-term care premiums for 2024 are:
$5,880 per person for those ages 71 or over
$4,770 for those ages 61 to 70 This means a married couple aged 71 or over can deduct up to $11,760 in long-term care insurance premiums in 2024. Self-employed individuals can still deduct 100% of their premiums on Schedule 1 of Form 1040.
These changes provide new opportunities for tax planning and retirement saving strategies. It's important to review your financial plan annually to ensure you're taking full advantage of these provisions.
Lastly, a tax deduction is a deduction that reduces a tax payer’s tax liability by reducing his adjusted gross income and potentially, taxable income. The more deductions you can find, the higher your potential for lowering your tax bill.
Tax deductions can be broken down into two important categories: above the line deductions and below the line deductions. The “line” is a reference to your adjusted gross income (AGI).
Now that you have a basic understanding of tax brackets, the new Secure Act and Secure 2.0, and tax deductions, let’s talk about above the line and below the line deductions.
Above the Line Deductions for 2022
Above-the-line deductions reduce a taxpayer's adjusted gross income (AGI) and are allowed regardless of whether you itemize or take the standard deduction. These deductions are important because reducing your AGI may help you qualify for additional deductions or credits on your return. High-income earners may consider the following above-the-line deductions:
Health Savings Account (HSA) contributions: HSAs offer triple tax advantages: contributions are tax-deductible, the money grows tax-free, and withdrawals are tax-free for qualified medical expenses at any age. For non-medical expenses, withdrawals become penalty-free (but still taxable) at age 65. The contribution limits for 2024 are:
$4,150 for individuals
$8,300 for families
An extra $1,000 catch-up contribution if you're 55 or older
Deductible Traditional IRA contributions: Contributions to Traditional IRAs may be deductible, with different income thresholds based on access to an employer-sponsored retirement plan. For 2024:
If neither you nor your spouse has access to an employer plan, there's no income limit for taking the deduction.
For a married couple with one spouse having access to an employer plan, the MAGI limit to deduct contributions is $230,000 - $240,000.
If both spouses have access to an employer plan, the MAGI limit is $123,000 - $143,000.
For a single filer with access to an employer plan, the MAGI limit is $77,000 - $87,000.
Qualified retirement plan contributions: Many employers offer qualified retirement savings plans such as 401(k), 403(b), and 457 plans. These remain one of the easiest ways for high-income earners to reduce taxes. Contributions are made pre-tax, reducing your taxable income directly. The income stated on IRS Form 1040 is net of any pre-tax retirement plan contributions. For 2024, the contribution limit for these plans is $23,000, with an additional $7,500 catch-up contribution allowed for those 50 and older.
Qualified Charitable Distributions (QCDs): A QCD is a distribution from an IRA owned by an individual age 70½ or over that is paid directly from the IRA to a qualified charity. The IRS allows you to donate up to $100,000 annually to qualified charities directly from your IRA, tax-free. This amount is indexed for inflation starting in 2024. QCDs can satisfy your Required Minimum Distribution (RMD) and potentially save you thousands in taxes if you are charitably inclined.
Download our free QCD checklist to see if you can take advantage of qualified charitable distributions.
Below the Line Deductions
Below-the-line deductions, which include the standard deduction and itemized deductions, are determined after calculating your Adjusted Gross Income (AGI). Not all below-the-line deductions will necessarily lower your taxable income. According to recent estimates, approximately 90% of taxpayers opt for the standard deduction rather than itemizing deductions.
For the 2024 tax year, the standard deduction amounts are:
$14,600 for individuals
$29,200 for married couples filing jointly
$21,900 for heads of household
These amounts are higher for blind individuals and those age 65 and over.
While itemizing deductions has become more challenging for high-income earners in recent years, careful planning can still yield significant tax reductions. Here are some tax reduction strategies to consider:
1. Charitable Contributions: High-income earners can maximize their charitable contributions and reduce their income tax through several strategies:
Donating appreciated stocks or other securities
Contributing to a donor-advised fund
Bunching multiple years' worth of charitable donations into a single year to exceed the standard deduction threshold
2. Mortgage Interest Expenses: If you're currently renting or have significant consumer credit card debt, purchasing a home or doing a cash-out refinance might allow you to deduct mortgage interest. For mortgages taken out after December 15, 2017, interest on up to $750,000 in principal may be tax-deductible. This limit applies to the combined amount of loans used to buy, build, or substantially improve the taxpayer's main home and second home.
3. Medical Expenses: Keep detailed records of your medical expenses. While you may be in good health, larger families or unexpected medical needs could allow you to deduct a portion of your medical expenses. For the 2024 tax year, medical expenses that exceed 7.5% of your AGI may be deducted as an itemized expense.
4. State and Local Taxes (SALT): The deduction for state and local taxes (including property taxes) remains capped at $10,000 for both single filers and married couples filing jointly. This cap is set to expire after 2025 unless extended by new legislation.
5. Miscellaneous Itemized Deductions: Note that many miscellaneous itemized deductions that were previously allowed (such as unreimbursed employee expenses and tax preparation fees) are no longer deductible following the Tax Cuts and Jobs Act of 2017. This provision is also set to expire after 2025 unless extended.
Income Deferral or Acceleration Strategies
Deferring or accelerating taxable compensation isn't the right approach for every situation, but it may reduce your exposure to income and capital gains taxes, as well as the 3.8% Net Investment Income Tax (NIIT) on certain investment income.
Income deferral isn't just about shifting income from one year to the next. Tax-savvy individuals know that creating a long-term income deferral strategy can help compound savings and investments more rapidly by postponing the tax burden.
It's crucial to note that the current tax rates established by the Tax Cuts and Jobs Act of 2017 are set to expire after 2025, unless extended by new legislation. This means that income deferred from 2024 might be taxed at a higher rate in future years if the tax laws revert to pre-2018 rates or if new tax legislation is enacted.
Key income strategies to consider:
Consider non-qualified deferred compensation contributions. If your employer offers a deferred compensation plan you can reduce your taxable income this year and build your post-retirement savings.
Ask your employer to defer income until 2023. Are you having a big year for commission income? If so, your taxable income may be higher this year than next year.. If you plan on receiving commissions or other types of earned income late in 2024, consider asking your employer to defer paying your income until 2025. If your taxable income is going to be lower next year, deferring your income until next year could reduce your tax burden by transferring the income to a lower tax bracket.
Delay or accelerate IRA withdrawals upon retirement. Depending upon your tax bracket, you may benefit from accelerating or delaying IRA distributions until a later date. For example, converting traditional IRA savings to a Roth IRA may be advantages if you plan to be in a higher tax bracket in the future. Conversely, you may consider delaying IRA distributions if you need to reduce your taxable income this year. Either strategy may help smooth out your tax brackets over time thereby reducing the income tax you pay in retirement.
Income Tax Deferral
Tax-deferred investment vehicles aren’t the same as tax-exempt (such as a Roth IRA or HSA accounts); at some point, there will be tax consequences associated with the distribution of the assets. However, tax-deferred accounts can be an effective tax strategy for high-income earners to reduce current year tax liabilities. Additionally, tax-deferred accounts benefit by compounding returns faster by sheltering income from current taxation.
Here are three tax-deferred investment vehicles to consider:
Qualified retirement plans: Contributing to a 401(k), 403(b), or 457 plan is one of the easiest ways to defer investment income. For 2024, the SECURE Act 2.0 allows employees to contribute up to $23,000 to these plans, with an additional $7,500 catch-up contribution for those age 50 and over. This means high-income earners age 50 and over can save up to $30,500 a year in a 401(k), providing more control over when you are able to retire. Your earnings are sheltered from tax until withdrawal, which means you won't pay tax on dividends, interest, and capital gains until you take a distribution from the account, typically at age 59½ or later.
529 plans for education: You pay federal taxes on your contributions, but the money grows tax-free, and distributions for qualifying educational expenses are not taxed. There are no annual contribution limits imposed by the federal government, but contributions are considered gifts for tax purposes.
For 2024, contributions up to $18,000 per donor per beneficiary fall under the annual gift tax exclusion. Contributions above this amount count against the lifetime estate and gift tax exemption.
For Virginians looking to reduce their Virginia income tax, up to $4,000 per account per year is deductible for state income tax purposes. (Note: State tax benefits may vary; please check your state's specific rules.) Money in these accounts can be used to cover:
Up to $10,000 per year for K-12 tuition
Qualified higher education expenses
Up to $10,000 (lifetime limit) to repay student loans
Certain apprenticeship programs
Cash-value life insurance: This remains a popular tax deferral strategy for high-income earners due to the potential for higher investment limits compared to some other tax-advantaged accounts. You make contributions with after-tax dollars, but the cash value can grow tax-deferred. Withdrawals up to the amount of premiums paid (your cost basis) are typically not taxed.
However, it's important to note that if the policy lapses or is surrendered, gains may be taxable. Also, if the policy becomes a Modified Endowment Contract (MEC), different tax rules apply.
Change the character of your income
You can adjust the assets in your portfolio to change the way your income is taxed. If you own a business, changing your business structure can be a very effective tax reduction strategy for high-income earners.
Here are some options:
Convert your traditional, SEP, or SIMPLE IRA to a Roth. After age 59-½ (if you’ve met the five-year rule), Roth distributions are generally tax-free. In addition, they aren’t considered investment income, so they won’t increase your MAGI for the 3.8% Medicare surtax. You’ll need to analyze your federal tax brackets, but Roth conversions can be a powerful tool to reduce the taxation of your future income.
Buy tax-exempt bonds. Interest income from tax-exempt bonds is excluded from Medicare surtax calculations and not subject to federal income tax. Even better, municipal bond interest on bonds purchased in your state of residence are state and federal income tax free.
Restructure your business entity. Incorporating your business lets you choose the tax structure that works best for you financially. A C-corp, for example, has a lower top tax rate than an S-corp or sole proprietorship. In addition, earnings from a pass-through entity may also qualify for a new deduction of up to 20% of business income. Switching to a sole proprietorship lets you hire your minor children without having to withhold or match payroll taxes. Children’s earnings are also taxed at a lower rate.
Invest Your Health Savings Account contributions. Many high-income earners either don’t use an HSA at all or they use it incorrectly. If you qualify for a Health Savings Account, consider investing your HSA contributions for the long-term instead of spending them on current medical expenses. Earnings will grow tax free and future distributions are tax free if used for a qualified medical expense.
Invest in tax-efficient index mutual funds and exchange-traded funds (ETFs). Every high-income earner should have a plan to diversify the taxation of income in retirement. For taxable accounts, a tax-efficient index mutual fund and/or ETF may help reduce the taxes you pay on your investments year-to-year. Index funds and ETFs can be more tax-efficient than actively managed funds.
Time your gains or losses
Effective tax strategies for high-income earners should include managing the timing of large gains so you aren’t subject to the Medicare surtax or pushed into the 20% capital gains bracket.
Here are some techniques to manage your gains:
Establish and contribute appreciated positions to a charitable remainder trust. Charitable remainder trusts disperse income to beneficiaries for an established period of time before the remainder is donated to charity. By contributing a long-term, appreciated asset, you avoid incurring tax on the gains and get a deduction based on the current value of the gift.
Invest in a Qualified Opportunity Funds (QOFs) were created by the Tax Cuts and Jobs Act of 2017. They offer several tax benefits for investing eligible capital gains in designated Opportunity Zones. Here are the key points, with corrections:
Tax Deferral: You can defer taxes on capital gains until December 31, 2026, by investing them in a QOF within 180 days of the sale that generated the gains.
Partial Tax Reduction: If you hold the QOF investment for at least 5 years before December 31, 2026, you can reduce your deferred capital gains tax liability by 10%.
Additional Tax Benefits: If you hold the QOF investment for at least 10 years, you may be eligible for additional tax benefits on the appreciation of your QOF investment.
Harvest unrealized losses on your investments. When stock markets fall, you may consider selling investments in taxable accounts that have losses. A strategy known as tax-loss harvesting allows you to sell your investments to capture your losses on paper. In 2024, the IRS allows taxpayers to deduct up to $3,000 in losses against regular income and allows you to offset losses with current and future year capital gains.
Losses not used in the current year can be carried forward to subsequent years.
Bundle your 529 plan contributions
If you want to maximize your family gifting, there is indeed a special provision for 529 plans. Under the law, an individual can make a lump-sum contribution of up to $90,000 (or $180,000 for married couples electing to split gifts) to a beneficiary's 529 plan in a single year. This amount represents five years' worth of gift-tax exemptions, allowing you to accelerate your gifting without incurring gift taxes.
It’s worth noting that any additional gifts to that same student over the next five years will reduce your lifetime exclusion. However, the student gets the benefit of kickstarting his account and the cash has more time to compound and grow.
For Virginia tax payers who want to know how to reduce Virginia income tax, 529 plan accounts can further reduce your taxable income by $4,000 per account.
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Conclusion
Wealth management is complicated. It takes more than finding the right tax reduction strategies for high-income earners to ensure your money is working for you in the most efficient way possible.
The right financial advisor makes all the difference.
At Covenant Wealth Advisors, we specialize in high net worth retirement planning and take the time to get to know you and understand your priorities and values. We’ll help you create a wealth management plan that accomplishes your goals and maximizes the assets you built over a lifetime.
We have a team of independent Certified Financial Planner practitioners who operate on a fee-only basis; meaning we never receive commissions for product sales. Additionally, we serve as a fiduciary which means we are required by law to always put your best interests and objectives at the forefront.
We can help you find the right tax-reduction strategies to conserve your wealth and the right investments to achieve your goals.
If you are a high-income earner aged 50 plus with over $1 million saved for retirement, request a free retirement assessment today!
About the author:
CEO and Senior Financial Advisor
Mark is the CEO of Covenant Wealth Advisors and a Senior Financial Advisor helping individuals age 50+ plan, invest, and enjoy retirement comfortably. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine.
Disclosure:
Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. We provide investment management, financial planning, and tax planning services to individuals age 50 plus with over $1 million in investments. Investments involve risk and does with possible loss of principal and does not guarantee that investments will appreciate. Past performance is not indicative of future results.
The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains 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.
Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account.
Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like accounting, tax or legal advice, you should consult with your own accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.
The RVA25 is an annual survey performed by Richmond BizSense. Companies profit and loss statements were reviewed by an independent accounting firm, Keiter CPA, and analyzed for three year revenue growth end December 31st, 2019. The top 25 fastest growing companies were chosen as recipients of making the RVA25 list. No fee or compensation was provided to Richmond BizSense or Keiter CPA for participation in the survey.