When it comes to taxes, having a higher income may not always be the blessing it’s often thought to be. With a bigger income comes increased tax rates, as moving into a higher tax bracket means a larger portion of income will be taxed at a higher rate. Those earners with multiple streams of income — investment income, capital gains, bonuses and more — can further complicate their taxes.
These factors, paired with the possibility of losing out on certain deductions or credits due to their income, mean high-income earners are often on the lookout for ways to optimize their tax strategy and minimize their tax liabilities, or what they owe.
As financial and tax experts themselves, the members of Kiplinger Advisor Collective know the ins and outs of effective tax strategies. Here, they offer up six ways high-income earners can minimize their tax liabilities and keep more money in their pockets.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Maximize contributions to tax-advantaged accounts
“High-income earners can optimize their tax strategy by maximizing contributions to tax-advantaged accounts like 401(k)s, IRAs or health savings accounts (HSAs). This reduces taxable income, lowering their overall tax burden. It’s effective because it not only provides immediate tax savings, but it also allows wealth to grow tax-deferred, enhancing long-term financial planning and retirement savings.” — Stephen Nalley, Black Briar Advisors
Sell investments that have depreciated
“Selling investments that have depreciated since you bought them, also known as tax-loss harvesting, can help you lower your tax burden each year. These losses can also be deducted from your investment gains or other income, up to an annual limit set by the IRS. If your losses are greater than these limits, you can carry them over to the following year to reduce your taxes in future years.” — Justin Donald, Lifestyle Investor
Choose a fee-only CFP
“The development of software analysis tools that can provide an integrated and holistic view of your financial situation, including how your tax liabilities affect the rest of your financial life, has increased significantly. Choosing the right fee-only Certified Financial Planner (CFP®) who offers a cost-effective way to integrate sophisticated and holistic tax planning strategies with financial planning is critical.” — Deborah W. Ellis, Ellis Wealth Planning
Take a three-pronged approach
“There are three important areas to consider for tax efficiency. Deferring taxes: Utilize preferential accounts such as 401(k)s, IRAs and annuities. Managing existing investment income: Place tax-inefficient assets in tax-deferred accounts, harvest tax losses and manage gains and distributions. Reducing future taxes: Use Roth IRAs, health savings accounts, 529s and municipal bonds to limit future taxes.” — Stephen Kates, Annuity.org
Minimize portfolio turnover
“Maximizing tax-advantaged savings to your retirement plan or health savings accounts can reduce your taxable income. Take advantage of charitable contributions, and minimize turnover in your portfolio by investing in transparent, diversified and tax-efficient exchange-traded funds (ETFs).” — Marguerita Cheng, Blue Ocean Global Wealth
Consider your highest-income years
“Explore depreciation. Often, high-income earners get to participate in depreciation on assets bought with debt. Plan for this in your highest-income years to maximize the benefit.” — Justin Brock, Bobby Brock Insurance
Related Content
- Three Tips for Selling Your Business and Getting the Most Value
- Five Ways to Minimize a Higher Capital Gains Tax Rate
- How Tax-Loss Harvesting Helps to Lower Your Tax Bill
- The IRS is Ramping up Tax Audits
Disclaimer
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
-
Stagflation: What It Is and Why Retirees Should CareStagflation — the economic bogeyman of the 1970's — may return to the US. Here's what it could mean to your retirement.
-
Why Losing Your Job Could Be the Best Opportunity to Plan Your FutureAmid this uncertainty lies an opportunity for strategic reassessment and personal growth.
-
What Can a Donor-Advised Fund Do for You? (A Lot)DAFs and private foundations go about helping charities (and those who donate) in different ways. Each comes with its own benefits and restrictions to navigate.
-
Estate Planning When You Have International AssetsEstate planning gets tricky when you have assets and/or beneficiaries outside the U.S. To avoid costly inheritance mistakes, it pays to understand the basics.
-
Retiring With a Pension? Four Things to KnowThe road to a secure retirement is slightly more intricate for people with pensions. Here are four key issues to consider to make the most out of yours.
-
How to Teach Your Kids About the Tax Facts of LifeTaxes are unavoidable, so it's important to teach children what to expect. Also, does your child need to file a tax return for 2024? Find out here.
-
Tax Advantages of Oil and Gas Investments: What You Need to KnowTax incentives allow for deductions and potential tax-free earnings — benefits accessible only to accredited investors in small producer projects.
-
Charitable Contributions: Five Frequently Asked QuestionsMake the most of your good intentions by understanding the ins and outs of charitable giving. A good starting point is knowing what's deductible and what isn't.
-
Taxes in Retirement: What ESOP Participants Need to KnowMost Employee Stock Ownership Plans (ESOP) participants transfer company stock to an IRA starting around age 55, so taxes on that money have been deferred.
-
How Roth Accounts Can Ease Your Tax Burden in RetirementStrategic Roth IRA conversions can set you up for tax-free income in retirement and a tax-free inheritance for the people you love.
