Tax strategies for high-income earners
The more you earn, the more tax you pay. Although this statement is generally true, there are steps you can take to reduce the bill.
High-income earners generally face higher taxes. However, there are ways to reduce your tax burden by taking advantage of tax deductions and savings options. Here's what you need to know:
What is a High-Income Earner?
From the perspective of the Internal Revenue Service (IRS), a high-income earner is someone who earns over $200,000 as their total positive income (TPI). TPI includes employment earnings, investment income, and capital gains from asset sales. It represents the amount liable for tax after applying eligible credits and deductions.
As your income increases, tax liability becomes more complex, so it's crucial to be aware of whether you fall into this bracket and understand how the rules apply to you.
Tax Rules for High-Income Earners
High-income earners are subject to specific tax rules, including those outlined in the SECURE Act. Some key rules and limits include:
Required Minimum Distributions (RMDs) begin from age 72 (raised in 2020).
There is no age limit to contribute to a traditional IRA.
Annual contribution limits to 401(k) and 403(b) plans are set at $20,500, and for a SIMPLE IRA, it's set at $15,500.
The maximum contribution to a traditional and Roth IRA is set at $6,500 per year.
High-income earners must pay the Social Security Wage Base tax, which is set at $160,200.
Long-term care premium deductions limits are set at $5,640 for individuals aged 71 and over.
Self-employed individuals can deduct 100 percent of health, dental, and qualified long-term care (LTC) insurance premiums if they are not eligible for a plan through their spouse’s employer.
2023 Federal Income Tax Brackets
The amount of tax you pay on your income depends on your personal situation and which bracket your earnings fall into. As it’s a progressive system, you don’t pay a single rate on your entire income. Instead, the income that falls into each bracket is taxed at that rate.
Federal income tax brackets typically change annually to account for inflation. In 2023, these are:
| Tax rate | Single filer | Married, filing separately | Married, filing jointly | Head of household |
|---|---|---|---|---|
| 10 percent | $11,000 or less | $11,000 or less | $22,000 or less | $15,700 or less |
| 12 percent | Over $11,000 | Over $11,000 | Over $22,000 | Over $15,700 |
| 22 percent | Over $44,725 | Over $44,725 | Over $89,450 | Over $59,850 |
| 24 percent | Over $95,375 | Over $95,375 | Over $190,750 | Over $95,350 |
| 32 percent | Over $182,100 | Over $182,100 | Over $365,200 | Over $182,100 |
| 35 percent | Over $231,250 | Over $231,250 | Over $462,500 | Over $231,250 |
| 37 percent | Over $578,125 | Over $346,875 | Over $693,750 | Over $578,100 |
Tax Saving Strategies for High-Income Earners
There are different deductions that high-income earners can apply to reduce tax exposure. A standard deduction is an amount set by the government. The alternative is itemized deductions, which are deductions you calculate and report. You will need to consider whether it makes the most financial sense to take the standard deduction or itemize your deductions.
All deductions fall into two categories: above the line and below the line.
Above-the-line tax deductions
You deduct these before calculating your annual gross income, reducing the income you are liable to pay tax on. You can apply these whether you itemize your deductions or take the standard amount.
Notable deductions include:
Health savings account (HSA) contributions—the money you save in an HSA is tax-free, as is the income it makes and the withdrawals you have to make to cover eligible medical expenses.
Retirement savings—you can deduct contributions to an IRA. Note that if you or your spouse can access a group plan, you can only make deductions up to set income thresholds. However, suppose your employer offers a retirement plan, such as a 401(k), 403(b) or 457, and you are enrolled. In that case, your employer will automatically deduct your contributions from your tax bill.
Student loan interest—interest on federal student loans over $600 is deductible. You can deduct whatever comes in lower: the total amount of interest paid or up to $2,500.
Qualified charitable distribution (QCD)—if you are over 70 ½, you can make donations to charity directly from an IRA to a qualified charity.
Below-the-line tax deductions
Once you know your annual gross income, you can apply either a standard or itemized deduction to calculate your taxable income. While the standard deduction is easy to apply, it can be worth the time and effort of itemizing deductions if the sum of these will come in higher.
Key deductions include:
Charitable contributions—different ways of donating to charity can help you maximize your tax deductions.
Mortgage/remortgage interest expenses—the interest you pay on the first $750,000 of a mortgage is deductible. You can deduct some interest payments if you have remortgaged in the tax year. Your lender will send you details of the deductible income you’re entitled to.
Home equity or line of credit loans—interest is deductible on these loans as long as the funds were used to build, buy, or substantially improve the property secured to the loan.
Medical expenses—qualifying out-of-pocket expenses exceeding 7.5 percent of your adjusted gross income are deductible.
Long-term care insurance premiums—qualifying premiums exceeding 10 percent of your adjusted gross income are deductible.
Taxes paid—paid personal property taxes and state and local taxes are deductible, but foreign real estate taxes aren’t.
Casualty or theft losses—losses that you incur as a result of a federally declared disaster can be deducted if, after subtracting $100, the losses exceed 10 percent of your annual gross income.
A key part of a financial advisor’s role is to show you the most appropriate way to reduce your tax bill. So speak to an expert for advice on which deductions to apply to make your earnings and savings tax efficient now and in the future.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.