6 Strategies to Reduce Tax for High-Income Earners

Learn how high earners use tax-planning strategies to legally reduce their taxable income and optimize their finances to build long-term wealth.

From Amazon.com Inc. Founder Jeff Bezos to former President Donald Trump, the ultra-wealthy employ financial experts and certified public accountants (CPAs) to help them legally reduce their tax burden. Some of these strategies could apply to you too. 

As financial services company Charles Schwab stated, "Strategically realizing or reducing income each year can help maximize after-tax returns — and potentially increase your wealth over time." 

With strategic tax planning, you can leverage legal strategies to minimize your tax liabilities and keep more of your hard-earned money. This guide will explore practical approaches, from donations to retirement accounts, to reduce taxable income and enhance your financial well-being.

What Is a High-Income Earner According to the IRS?

Are you a high-income earner? The IRS defines "high-income earners" based on adjusted gross income (AGI) and tax filing status. For the 2024 tax year, the top marginal tax rate of 37% applies to people with a taxable income above $609,350 for single filers or $731,200 for married filing jointly. This is the highest tax bracket, and these numbers were adjusted for inflation in late 2023. 

The second-highest tax bracket could also be considered high-income earners. That's 35% for incomes over $243,725, for individuals. The highest tax brackets underscore the importance of tax planning for high-income earners, as a significant portion of your income could potentially be subject to the maximum tax rate.

However, according to the Bureau of Labor Statistics, the average annual wage for all occupations is $65,470. If you earn significantly more than that, even $100,000 or more, you could benefit from some of the tax-saving strategies below. Read on to learn how to reduce taxable income for high earners.

How to Reduce Taxable Income for High Earners

Whether you make $100,000 per year or $700,000 per year, the tax strategies below can help you plan for retirement, optimize tax-deferred investment accounts and do good in the world. 

1. Maximize Retirement Plan Contributions

Contributing to tax-advantaged retirement accounts, such as 401(k)s, individual retirement accounts (IRAs) and other employer-sponsored plans can significantly reduce taxable income. These contributions are typically made with pretax dollars, lowering the amount of income subject to taxation in the current year.

For example, if you earn $300,000 annually and contribute the maximum $20,500 to a 401(k) plan, your taxable income is reduced to $279,500. You can also use 529 plans to save for your children's education. 

2. Consider Tax-Deferred Investment Accounts

Investing in tax-deferred accounts like annuities or deferred compensation plans can help to defer taxes on investment gains until withdrawal, potentially allowing high-income earners to pay taxes at a lower rate during retirement. Because many high-income earners will earn significantly less in retirement, the tax savings could be substantial. 

3. Leverage Tax-Efficient Investment Strategies

Investing in tax-efficient vehicles, such as municipal bonds or low-turnover index funds, can minimize the impact of taxes on investment earnings. Additionally, strategically timing the realization of capital gains and losses can help offset taxable income. You may want to speak with a financial planner with a fiduciary responsibility to see how this could work for your situation. Learn more about how investments are taxed. 

4. Establish a Charitable Giving Plan

One of the most effective tax-planning strategies for high-income earners involves making charitable contributions to qualified 501(c)(3) organizations. These donations are tax-deductible and can significantly reduce taxable income for those who itemize deductions. Strategies like donor-advised funds or qualified charitable distributions from IRAs can maximize the tax benefits of charitable giving.

You can also consider setting up a charitable trust, such as a charitable remainder trust (CRT) or charitable lead trust (CLT) to provide immediate tax deductions and potentially reduce estate and gift taxes while supporting charitable causes.

Finally, you can consider donating appreciated assets, like stocks or real estate, to qualified charities. You can avoid paying capital gains taxes on the appreciation and receive a tax deduction for the fair market value of the asset.

5. Use Tax-Advantaged Healthcare Accounts

Contributing to health savings accounts (HSAs) or flexible spending accounts (FSAs) allows you to pay for qualified medical expenses with pretax dollars, reducing your total taxable income. This strategy won't give you a huge boost, but every little bit counts. The maximum contribution for family coverage to a HSA is $8,300. Those age 55 and older can make an additional $1,000 catch-up contribution. You can also consider an HSA for retirement planning. 

6. Explore Business Deductions

For entrepreneurs or self-employed people, claiming legitimate business deductions for expenses like home office costs, vehicle expenses and business-related travel can significantly reduce taxable income. You can learn more about business deductions here. 

Applying Tax-Saving Strategies

Take a look at some examples of tax-savings strategies in action:

How can I reduce my taxes if I make over $500,000?

By implementing the strategies above, such as maximizing retirement contributions, leveraging tax-deferred accounts, investing tax-efficiently and establishing a charitable giving plan, high-income earners making over $500,000 could save tens of thousands of dollars in taxes annually.

How can I reduce my taxes if I make over $300,000? Or how can I reduce my taxes if I make over $100,000?

The same strategies, like tax-advantaged retirement accounts, apply whether you're earning over $100,000 per year or over $300,000 in taxable income. For example, plan to:

• Maximize retirement account contributions, including tax-advantaged accounts such as 401(k) plans, 403(b) plans and traditional IRAs. 
• Consider a backdoor Roth IRA. If your income exceeds the limits for contributing directly to a Roth IRA, you may be able to take advantage of the "backdoor" Roth IRA strategy. Speak to a certified public accountant (CPA) to understand options.
• Use tax-deferred investment accounts such as annuities or deferred compensation plans to help you postpone paying taxes on investment gains until withdrawal.
• Maximize charitable contributions to qualified 501(c)(3) organizations to help reduce your taxable income. Consider strategies like donor-advised funds or bunching multiple years' worth of contributions into a single tax year to maximize the tax benefits.
• Invest in municipal bonds, which are generally exempt from federal income tax and may also be exempt from state and local taxes.
• Explore business deductions if you are self-employed or own a business.
• Consider tax-loss harvesting if you have investment losses. You can use tax-loss harvesting to offset some capital gains.

Everyone's tax situation is unique, and it's a good idea to consult with a qualified tax professional or financial advisor to determine the most appropriate strategies for your situation.

Tax-Saving Strategies for High-Income Earners

Tax planning is a critical aspect of financial management, especially for high-income earners. By implementing the strategies outlined above, such as maximizing retirement contributions, investing tax-efficiently, establishing charitable giving plans, using tax-advantaged healthcare accounts and exploring business deductions, you can effectively reduce your taxable income and keep more money working for you. 

Remember to stay proactive, consult with tax professionals and continually review your financial situation to ensure you're taking advantage of all available tax-saving opportunities. Looking to optimize savings? You can also find the best Roth IRA accounts here.