You’re probably dreading tax time. It’s a little unsettling to know that you’re in one of the high brackets, and because you don’t know the ways of reducing your tax rates, that could be a problem. In fact, there are dozens of things that a high-income earner like yourself can do to lower their taxes. You just need to know your options and how to take steps towards using those options.
Hi, I’m Mark Fonville with Covenant Wealth Advisors. I know it’s tough to keep up with those constantly changing tax laws, especially if you are a high-income earner. In this video, I’m going to show you the available options for reducing taxes when you’re in a high tax bracket. So let’s get started.
Understanding complexities in tax laws and reduction strategies will be better equipping you in dealing with your tax burden. You can reduce substantially your tax liability by utilizing certain tax-reduction strategies and taking advantage of the latest tax laws. Knowing current tax laws inside and out can be overwhelming, so don’t be afraid to ask a professional for guidance.
Tax Laws
You may have heard about the Tax Cuts and Jobs Act of 2017, in which new tax legislation made small reductions in income tax rates in many tax brackets. You may not be as familiar with the fact that those changes were temporary in nature and increased the standard deduction for both individual and joint filers.
Now, higher standard deductions have made it hard to find itemized deductions for high-income earners. The other tax law that gave the high tax bracket individuals a hard time was the Secure Act and Taxpayer Certainty and Disaster Tax Relief Act of 2019. In totality, both these and the changes that came with them have made it even more difficult to use any kind of tax relief strategies as a high-income earner. But not impossible—so long as one is prepared.
First, let me ask you a question: do you know what your tax bracket is? You know you’re in a high bracket, but are you really positive what that will mean? The ordinary income tax bracket refers to the percentage of tax owed to the IRS on every taxable income tier. Being the high-income earner, you should understand how each and every one of your dollars earned will be taxed. Your tax rate, based on your high income, is somewhere in the range of 32% to 37%.
With the Secure Act came some provisions that will have an impact on your retirement and tax planning. Those that will be of interest to you are:
- A higher age for required minimum distributions
- No age limit for traditional IRA contributions
- An increase in annual limits for simple IRAs
- A raise in Roth IRA income ceiling
- A base wage increase for Social Security
- An increase on limits for long-term care premium deductions
Deductions
These provisions are important because they provide you with greater opportunities for deductions. The more deductions you find, the lower your tax bill will be.
Your tax deductions will be broken into two categories: above the line and below the line. The line itself simply refers to your adjusted gross income.
Above the Line Deductions
Above the line deductions actually lower your adjusted gross income, which could make you eligible for additional deductions or credits. You may be able to make above the line deductions for:
- Health savings account contributions
- Deductible traditional IRA contributions
- Qualified retirement plan contributions
- Qualified charitable donations
Below the Line Deductions
Below the line deductions are standardized or itemized deductions that are derived after your AGI has been determined. Most taxpayers take standardized deductions because itemized deductions are substantially more painful than they once were for high-income earners. You will be able to itemize your deductions with some planning and education, which allows you to dramatically decrease your tax bill through the following:
- Charitable gifts
- Mortgage interest deductions
- Medical expenses
Another tax savings opportunity involves the deferral or acceleration of income, and has the potential to lower your income, capital gain, and the Medicare 3.8% surtax. Although a deferral may enable you to compound the savings or investment, the current tax rates expire in 2025, which may negatively impact you if the higher applicable rate is applied on the deferred income. Should you want to consider deferring your income, the following are some considerations:
- Nonqualified deferred compensation contributions
- Discuss with your employer deferral of income until 2023
- IRA withdrawals upon retirement could be further postponed or accelerated
Income tax deferral can be an effective means to lower the current tax year liability. Tax-deferred compounding is a very strong motivator of growth in wealth and protection of income from being presently taxed. Some of the investment vehicles for tax-deferred investing you may consider are:
- Qualified retirement plans
- 529 plans for education
- Cash value life insurance
Conclusion
Other considerations you might want to discuss in developing your high-income tax strategy include:
- IRA Roth Conversions
- Tax-free bonds
- Business Entity Restructuring
- HSA Investing Contributions
- Tax Efficient Investing using Index Mutual Funds
- Large Gain Management
- Bundling 529 plan contributions
Filing taxes can be overwhelming and a cause for anxiety if you earn a high income. Fortunately, there are a number of strategies that can help you reduce your tax bill. In fact, tax planning really should be done in the context of an overall comprehensive plan that addresses your total financial life.
If you’re looking for how our team can assist you in reducing taxes, invest tax-efficiently, and plan for retirement, do not hesitate to reach out.