High-income tax planning: what strategies can help save you money?

Summary 

What is a high-income earner? 

What it means to be a high-income earner is relatively subjective.  

Many state that high earners are those who earn within the top three IRS federal tax brackets. 

So, this means earning over $191,951 of taxable income as a single person, a married person filing separately, or a single head of household, or over $383,901 of taxable income as a married person filing jointly.  

However, some believe you need to earn over $500,000 annually to be considered a high earner. 

In contrast, according to YouGov, the global public opinion and data company, high-income earners are those who earn over $100,000 per year.  

What are the tax rules for high-income earners? 

High-income earners pay the highest average income tax rates.  

For 2024, the federal tax brackets and income tax rates are as follows: 

High-income earners may also have to pay additional taxes that those in lower-income brackets do not.  

If you are an investor, you may owe net investment income tax (NIIT).  

This is an additional 3.8% tax on invested income. You only pay this if your modified adjusted gross income (MAGI) is over a specific threshold. 

For single filers, this threshold is $200,000; for married filing jointly, it is $250,000; and for married filing separately, it is $125,000.  

Additionally, if you earn beyond an income limit – $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for all other taxpayers – you must pay an additional Medicare tax of 0.9%.  

5 tax saving strategies for high-income earners  

As a high-income earner, applying one or a number of these tactics can help reduce your bill.  

While planning, it’s always best to get the advice and guidance of a professional. A financial advisor can help you execute some of these strategies and identify even more ways to potentially lower your tax bill.  

To get started, here are just five ways you could reduce your tax burden as a high-income earner: 

1. Max out your retirement accounts 

This specifically refers to your tax-advantaged accounts, such as a: 

These accounts allow you to lower your taxable income as the money you contribute to them is not taxed when you withdraw it from your account.  

With less taxable income, you may even be able to move down a tax bracket and reduce your overall liability.  

In 2024, the maximum 401(k) contribution and 403(b) contribution is $23,000, while the maximum contribution for SIMPLE IRAs is $16,000. 

For SEP IRA users, you are limited to 25% of your net earnings from self-employment.  

2. Consider a Roth IRA conversion 

While income limits make it difficult for high earners to contribute to a Roth IRA, there are ways around this.  

A backdoor Roth IRA is a way for high-income earners to open (and reap the rewards of) a Roth IRA regardless of IRS-imposed limitations.   

Here, you open a traditional IRA and make contributions. You then convert this traditional IRA into a Roth IRA and pay the necessary tax on the conversion.  

From then on, your money grows tax-free, you can withdraw it without paying tax, and you no longer must abide by the required minimum distributions (RMDs).  

3. Donate to charity 

Donating to charity is a common tax-saving strategy among high-income earners.  

According to the IRS, you can deduct charitable cash contributions of up to 60% of your adjusted gross income.  

Additionally, an option for high-income earners is to set up a donor-advised fund.  

A donor-advised fund is a charitable investment account. Here, you can donate to the fund and take an immediate tax deduction. The money is then held within the fund or invested for further growth. 

 The donor can then decide how to allocate the funds and provide grants to the qualified charities.  

4. Invest in an opportunity zone 

According to the IRS, a qualified opportunity zone (QOZ) is an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. 

Those who choose to invest in QOZs defer tax on the invested gain amounts until there is an event that reduces or terminates the qualifying investment or December 31, 2026, whichever is earlier. 

5. Consider moving your primary residence  

If you have multiple residences, you can take advantage of tax residency planning.  

Here, you can choose to have your primary residence in a low-tax state.  

Tax rates differ across the US. Some states, such as Hawaii, New York, and California, have high tax burdens, while states such as Alaska and Florida have lower tax burdens.  

Nine states – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming – also have no state income tax, making them an attractive option for high-income earners. 

However, before making a big move, it’s worth remembering that states with low or no income tax often charge higher rates for other things. 

Additionally, some states pursue high earners if they earn money in the state or try not to pay income taxes. 

Get expert tax advice 

As mentioned, getting professional financial advice when dealing with lowering your tax bill is highly recommended.  

Not only does this allow you to utilize even more strategies to save money, but it also ensures your efforts are above board and IRS-compliant.  

A financial advisor can help you develop a robust tax-saving strategy and meet your financial goals. 

Let Unbiased match you with an SEC-regulated financial advisor.  

Get started now.