If you are a high-income earner in the US, you surely understand the burden of heavy taxes that comes with high-income earnings, and you have probably been looking for tax-saving strategies for high-income earners.
As a high-income earner, your tax planning has to be proactive and strategic because you need to protect your assets. While it is only understandable that the United States tax code places higher tax rates on the super-rich, it is also expected that high-earning individuals seek out means to reduce their tax burden. There are also processes to assist you in modifying what portion of your income is taxable to protect your wealth.
Here are the top 3 tax-saving strategies for high-income earners:
Leverage on your retirement contribution plans
In simple terms, when you save for your retirement, you may get an opportunity to lower your taxable income. However, other approaches may also be used, making it important to work with a Certified Public Accountant to clarify which tax-saving strategies for high-income earners would be best for you.
Employer-sponsored retirement plans, one of which is the 401(k). There are also individual retirement accounts (IRAs). A 401(k) plan is a type of retirement plan offered by many American employers to their employees. It provides tax-reduction benefits to the saver. By signing up for 401(k), you agree to have a percentage of your paycheck paid directly into an investment account via any listed investment options, usually mutual funds.
On the other hand, an IRA contribution is made after tax is deducted from the income. Therefore, the contribution is already taxed and would not attract any further tax burden when you make a withdrawal.
An employer-sponsored retirement plan is a strategy that allows you to make pre-tax contributions up to a maximum of $20,500 in 2022 (previously $19,500 in 2021). High-earners aged 50 years and above can make an additional catch-up contribution of $6,500. The pre-tax contributions you make towards retirement plans would reduce your income for that tax year and that way you can save the taxes on this contribution.
In a 401(k), the money you contribute towards your retirement plans is not taxed as income until you withdraw the money from the account. Moreover, if you do not make these withdrawals until you retire, the deductible tax will be much less than when you earned money as an income.
Restructure your business
Another of the tax-saving strategies for high-income earners to be discussed is creating (or re-organizing) a structure for your business. This could afford you the opportunity to present your expenses, thereby rendering them non-taxable. For instance, a Limited Liability Company could diversify into managing multiple investments.
Another way to work around this is by investing in a dividend-paying company. If your own business is already restructured for lesser taxes, and you still require other strategies to reduce your taxes, then you can invest in a company that pays qualified dividends. Note that ordinary dividends are taxed just like regular income, making them non-effective.
To benefit, you have to invest in organizations that pay qualified dividends issued by a United States company. With the help of a CPA and the IRS Publication 550, you can find out the companies that offer qualified dividends.
Donate to Charity
Donating to charity is one of the smartest tax-saving strategies for high-income earners. When you donate to charity, you enjoy the privilege of a tax deduction in the year the donation is made. However, the sweetener is that beyond that year, you can get tax deductions for subsequent years by setting up a Donor-Advised Fund(DAF).
A DAF allows high-income earners to make charitable contributions and receive an immediate tax deduction in return.
You also get to recommend grants to charitable organizations you trust from the fund. This can be set up for yearly contributions, reducing your taxable income.
In conclusion, these three tax-saving strategies for high-income earners are sure to help you navigate the crippling tax burden legally and effectively. And of course, these strategies require smart and proactive planning to determine which would be most suitable for your financial situation, and you should discuss with an expert.
Headed by Shauna A. Wekherlien (CPA, Masters in Taxation, and Certified Tax Coach), Tax Goddess is a tax and accounting firm that specializes in tax reduction, audit assistance, and accounting services. As a top 1% CPA in the US, what sets us apart from other CPA’s is our cutting-edge system in which our team of professionals, we are a team of experienced tax professionals who will work with you to develop a customized plan to reduce your taxes while creating the most-effective financial plan possible.
Over the past twenty years, we have helped individuals and business owners from across the US keep more of their hard-earned income by saving a total of $423,984,402 and counting.
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