Taxes can be confusing no matter how much money you make. For high-income individuals, though, there are even more rules and regulations regarding your money. Most people don’t have time to study the tax code themselves, but they also don’t want to give Uncle Sam a third of their income.
So how do you hold on to more of your hard-earned money?
With smart tax-saving decisions. Strategies like tax advantaged investments or charitable investment accounts allow you to claim tax breaks and save money each year. By using these and other tax saving tips for high-income individuals, you can keep more money in your pocket come April 15.
Let’s take a closer look at the best tax savings tips for high-income individuals.
Why Are Tax Savings Important?
Tax savings can make a big difference for your bottom line. Our income tax system is progressive and you are taxed at different (higher) rates as your income increases. The more you earn, the higher your effective tax rate..
This might sound daunting, but keep in mind that high-income individuals also have greater opportunities for tax savings. There are more complex solutions that can be applied to your finances to secure tax breaks and tax credits or avoid additional income taxes such as the capital gains tax.
In short, tax savings are important because they keep more of your money in your pocket.
5 Tax Saving Tips for High-Income Individuals
Hire a CPA
Whether you’re a business owner or a W-2 employee, hiring a CPA to manage your finances is a smart move. These professionals can help you with tax preparation and strategic tax planning. They’re your go-to resource when it comes to tax savings.
Certified public accountants are financial professionals trained to help you adhere to both federal and state law. They keep up with changes to tax laws and the tax code so their clients are always in compliance when it comes time to file tax returns. This can save money by preventing costly run-ins with the IRS.
CPAs also help you to ensure you’re maximizing your tax deductions each year. You’d be surprised how much money can be left on the table when you don’t itemize your deductions. Your CPA can find all of your potential deductions and file them correctly so you get the largest possible return.
Hire a Financial Planner
Financial planners can help you effectively manage your money and save tax dollars. These professionals focus on the future of your assets and investments and set you up for long-term financial success.
For high-income individuals, financial planners can help you choose tax-advantaged investment accounts that help you earn interest and might even protect you from things like high capital gains taxes. Educational savings accounts and donor advised funds are two examples of tax-advantaged investments outside of traditional retirement account options.
Financial planners focus more on the big picture and looking forward and try to find ways your money can work for you.
Let Your CPA and Financial Planner Work Together
Ideally, if your income is climbing into the higher tax brackets, you’ll have both a CPA and financial planner on your team. Each of them can bring their expertise to the table so you have a solid financial plan for now and for later.
Your CPA will manage the nitty gritty of your finances—filing taxes, reconciling bank accounts, assessing potential deductions. Your financial planner, on the other hand, will create a path for you to invest in tax-advantaged accounts and grow your wealth over time.
Together, these two professionals will have a comprehensive picture of your financial health. Your CPA can focus on the practical here and now, saving money in this year’s tax return. Your financial planner will be looking ahead to see where you can invest to minimize your tax burden.
You’ve probably heard that there are tax breaks when you donate to charity. Once you surpass a certain income threshold, the options to give charitably grow significantly. Here are a few popular ways you can use charitable giving to support tax savings:
- Donor-advised funds (DAF): These are investment accounts that exist specifically to support charitable organizations. You can take tax deductions for each donation made from this type of account. And you can donate appreciated securities (which we’ll discuss in a moment) to your DAF.
- Donation stacking: Stacking contributions is a tax strategy in which you stack multiple years worth of giving into one year tax year. For example, if you plan to give $10,000 annually to a charitable organization, you might put $40,000 into your donor-advised fund at one time to maximize your itemized deductions. This way you get an immediate tax deduction on the entire amount instead of on just a portion each year for four years. Then, you may take the standard deduction for the next three years.
- Donate appreciated assets: These are liquid assets such as stocks, bonds, or real estate. When you donate appreciated assets, you can often avoid paying the capital gains tax on your earnings and deduct the full fair-market value from your income taxes, as long as it doesn’t exceed 30% of your adjusted gross income.
Using investments as a means of tax savings isn’t most people’s first thought, but it can be an easy way to mitigate taxable income at the end of the year.
One type of investment is a backdoor Roth IRA. Roth IRAs have income restrictions that often disqualify high-income individuals, but traditional IRAs do not. A backdoor Roth IRA is created when a high-income person creates a traditional IRA and then rolls it over into a Roth IRA.
There are other savvy savings techniques that take a little more know-how. Some examples include:
- Tax loss harvesting: This strategy involves selling securities to when the market is down to “realize” losses that you can then use to offset capital gains this year and to “carry forward”indefinitely in the future.Buying municipal bonds: Municipal bonds are issued by state or federal governments and are exempt from federal income tax. Purchasing this type of bond is typically a good idea for people in the 35% and above tax brackets.
- Investing in ETFs: ETFs are great investments for people who don’t want the risk of individual stocks, but want stock market returns.. The tax benefit of choosing an ETF is that they don’t typically don’t pay capital gains distributions at year end the way most mutual funds do.
Personalize Your Strategy
Although all of these tips are great tax saving tips for high-income individuals, it’s important to remember everyone is different. The strategy that will work best for you should be highly personalized to your financial situation and goals.
If you want to find meaningful tax savings, schedule a meeting with your CPA and financial planner to see what they think might be the best strategy for you. You can bring up some strategies you’re interested in pursuing or get more information about what they’re advising you. Let your professionals guide you to the right path.
At Metanoia Financial, we have a team of financial professionals (basically, a virtual family office of experts)who would love to help you find ways to save some of your hard-earned money, both now and when tax season rolls around. Book your free consultation with us today to see how we can help you find meaningful tax savings.