Tax Planning Strategies for High-Income Earners
Are you tired of paying high taxes? Here are helpful tax strategies for high-income earners that help increase savings.
Tax Strategies for High-Income Earners
Consider using above-the-line deductions to help reduce your adjustable gross income (AGI). These deductions are allowed even if you take a standard deduction and help you qualify for other credits on your return. Here are some tips on how to reduce AGI using above-the-line deductions:
Health Savings Account (HSA)
Contributing to an HSA is a great tax planning strategy because they offer three tax advantages:
- The contributions are tax deductible
- The growth is tax free
- Withdrawals are tax free for qualified expenses
Potential contributions for HSAs are capped at $3,600 for individuals and $7,200 for families, but you can contribute an additional $1,000 if you’re over 55.
Roth IRA Conversions
Creating and contributing to a Roth IRA is an effective tax planning strategy. Roth IRAs are tax-free accounts that help reduce your long-term tax burden. Contributions to a Roth IRA are made from post-tax income, but any withdrawals after turning 59.5 are tax free. Consider rolling over money from a traditional IRA or 401(k) plan to increase benefits.
Contributing to an employer-sponsored retirement plan is one of the easier ways to reduce taxable income. These contributions are removed from your paycheck before taxes, and the most remains tax free in a 401(k) or 403(b). The maximum allowable contribution for 2021 was $19,500, but for 2022 the cap has increased to $20,500. You can set up a solo 401(k) plan that offers the same benefits if you’re self-employed. Remember, workers over 50 are eligible for a $6,000 catch-up contribution.
Maximize Tax Optimization by Bunching Deductions
One helpful incoming tax planning strategy for people with itemized deductions is the Bunching Deductions strategy. With this technique, you pay and take as many itemized deductions as possible in one year and then take the standard deduction the following year; this maximizes the total tax deductions taken over a 2-year period. Here are some common deductions to consider when planning your Bunch Deduction strategy:
Most medical expenses are unplanned; however, if you have expensive prescription costs or upcoming elective surgery, try and group those items in the same year. The costs of diagnosis, treatment and prevention of disease all qualify as deductible medical expenses. The minimum deduction threshold for medical expenses is 10% for 2021 and will be 7.5% for 2022.
Paying next year’s property tax bill before the end of the current year allows you to claim that amount as a deduction. These deductions for state and local taxes are capped at $10,000, and the SECURE Act restricts the amount of time that distributions must payout to individual beneficiaries to no more than 10 years.
Charitable contributions through a Donor Advised Fund (DAF) may be the best way to bunch your deductions. A DAF is an account in which you donate your appreciated assets in one year and hold your funds until you deduce to grant money to a charity. This allows you to take the deduction in the year the contribution was made and enables you to give months to the charity of your choice.
Let Summit Wealth Partners Help With Your Strategic Tax Management
Summit Wealth Partners understands the importance of staying focused on long-term financial goals and guides our clients through the clutter of information, so they remain focused on what’s most important. Our comprehensive wealth management solutions incorporate tax optimization, investment management, and other services tailored to your needs. Some of the benefits you receive when working with our team include:
Our experienced investment team develops an approach using academic research and state-of-the-art technology to protect your wealth. We believe in managing risk with a solid, disciplined approach that respects your long-term goals.
Our solutions use tax planning strategies, broad diversification, and regular rebalancing to give you the best opportunity to see higher returns at your ideal risk level. When working with Summit, your assets are protected by your preferred institutional service.
Transparency is a pillar of our tax planning strategies. We aim to keep things simple and continually monitor your finances to make sure your goals remain on track. Our proactive communication keeps you informed, which allows you to have peace of mind.
Contact Summit Wealth Partners today to start your journey to a more financially secure future.