Tax Strategies For High-Income Earners
» by Jeffrey Janson, CFP®, AIFA®
Are you a high-income earner that feels like you’re not making the most of your money? You’re not alone—properly managing a large stream of income can be extremely difficult. Taking the right financial strategies can make or break your financial future.
One key part of wealth management for high-income earners is tax optimization. Are you confused or intimidated by taxes? Read our guide to tax strategies for high-income earners. This guide breaks down why tax optimization is important and offers high net worth tax planning techniques that can guide your financial future in the right direction.
Why Is Tax Optimization Important?
Many fail to realize the impact taxes have on their overall financial picture. While taxes seem insignificant when examined on a case-by-case basis, they add up to a colossal amount of money over time.
Let’s take the example of an individual who makes $20 million annually. While an income tax difference of 2% may not sound substantial, it adds up to $400,000 annually. That money can be reinvested, put towards a retirement fund, or stored in a trust fund for your children. Following the right tax strategies for high-income earners in 2022 can reframe your financial picture.
What Makes Someone a High-Income Earner?
After reading our example of a $20 million earner, you may be wondering if you’re classified as a high-income earner. While tax optimization is a worthwhile pursuit for people of all income levels, this guide is geared towards individuals making $500,000 or more annually. These strategies have no upper cutoff, meaning that whether you’re making $550,000 or $40 million annually, you stand to benefit!
Our High Net Worth Tax Strategies
Our tax strategies for high-income earners include:
Investing in a Health Savings Account
A health savings account (HSA) is a basic tax planning strategy that’s easy to execute. HSAs offer three tax advantages:
- Contributions to an HSA are tax deductible
- HSA account growth is tax free
- Withdrawals are tax free for qualified expenses
Unfortunately, there is a cap on HSA contributions, so you can’t invest too much money into them. HSA contributions are capped at $3,650 for individuals and $7,300 for families in 2022. There is an additional “floating” contribution of $1,000 allowed if you’re over the age of 55. While this may not sound very substantial, $7,300 of tax-free savings adds up over multiple years.
Roth IRA Conversions
Roth IRA’s are another tax strategy for high-income earners that we highly recommend. Roth IRAs are tax-free accounts that help reduce your long-term tax burden. Contributions to your Roth IRA have to be made from what’s left of your post-tax income.
Withdrawals made on a Roth IRA after you are 59.5 years old are tax free. This makes Roth IRAs one of the best investments for high-income earners concerned about their future. We strongly advise investing in a Roth IRA as soon as possible to make sure that you’re able to retire comfortably. It’s possible to roll over money from a more traditional IRA or 401(k) plan if you’re interested in receiving the benefits of a Roth IRA.
One of the best tax strategies for high-income earners is the Bunching Deductions strategy. This involves paying and taking as many itemized deductions as possible in one year and then taking the standard deduction the next year. While this does make you take a hit in the first year of the strategy, it pays off and maximizes total tax deductions taken over a 2-year period.
There are some common deductions that you need to consider when executing a Bunching Deduction strategy:
While the majority of medical expenses are unplanned, you can try to group some medical items in the same year. Elective medical expenses you can try bunching in the same year include:
- Expensive Prescription Costs
- Upcoming Elective Surgeries
- Optional Co-Pays
- Treatment and Prevention of Disease
The minimum deduction threshold for medical expenses in 2022 is 7.5%.
Pay next year’s property tax bill before the end of the current year. This will allow you to claim that next bill as a deduction. Unfortunately, these deductions for state and local taxes are capped at $10,000. This is due to the SECURE Act, which restricts the amount of time that distributions must payout to individual beneficiaries no more than 10 years. While this tax strategy for high income earners is somewhat limited, it’s still an effective way to minimize how much you’ll have to pay in taxes.
Want To Learn More About Estate Tax?
Understanding estate planning could reduce your tax liability.
One of the best ways to bunch your deductions is through charitable contributions that are conducted through a Donor Advised Fund (DAF). A DAF is an account in which you donate your appreciated assets in one year and then hold your funds until you deduce and grant your money to a charity. This lets you take the deduction in the year that the contribution was made and then gives you months to choose a charity.
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.
Maximize Your Money
Want to learn more about how to reduce taxable income for high earners? Come to Summit Wealth Partners for a consultation. We’ll tailor a plan for you based around your financial goals. Whether you’re interested in exploring tax shelters for high-income earners or are just looking to optimize your tax management, our team of experts is ready and eager to help!