Tax reduction strategies for high income earners
“With great power comes great responsibility,” the saying goes, and if you earn a lot of money, then you may have already realized by now that with lots of money come lots of taxes.
The IRS taxes earned income in several ways and at both federal and state levels. Although the payment of taxes is inevitable and would be nearly impossible to avoid, there are a few tax reduction strategies for high income earners that could help you lower the amount you have to pay in taxes. They are listed below.
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Create a donor-advised fund
If you are one who loves to contribute a meaningful quota to society by giving back to charity, then you may already know that charitable donations are not only a noble service towards humanity but also a great tax reduction strategy. A charitable donation will provide you with certain beneficial deductions on your credit report. This is what makes it one of the best tax reduction strategies for high income earners.
If you make charitable donations to a tax-qualified charitable organization, then you may be able to get a deduction of up to 60% of your adjusted gross income each year. This is why it is a highly advisable tax reduction strategy for high-income earners to open a donor-advised fund.
The most prominent benefit of opening a donor-advised fund is that it allows you to take both current and future year contributions and deduct them in the current year.
You can establish a donor-advised fund with a brokerage firm or a second fund sponsor. You may deduct all the money you put into the fund that year from your credit return, however, it gets pretty interesting when you realize that you don’t have to actually donate all the money to a charity that year.
A donor-advised fund allows you to gather up your charitable contribution deductions into a single year, thus giving you a huge tax deduction for that year.
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Create Retirement accounts:
Creating retirement accounts is one of the great tax reduction strategies for high income earners. The law permits you to deduct the amount you deposit into a tax-certified retirement account from your tax return. Additionally, you are not required to pay taxes on investment earnings from retirement accounts until you actually withdraw them.
If you are employed, then it is advisable to fund the retirement accounts offered by your employer. If, on the other hand, you are self-employed, then we advise that you establish your own retirement accounts by yourself, such as a traditional IRA, an individual 401(k), or a Simplified Employee Pension IRA.
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Donate Stocks to Charity
Money isn’t the only thing that you can give away to charity and get a huge tax deduction for, gifts of stocks, and other securities work great as well. This can include stocks, mutual funds, treasury bills, corporate and municipal bonds, and stocks held in non-publicly traded companies.
Tax laws offer you up to a 30% deduction in your adjusted gross income each year for stock donations that you make to charity. The deductible amount is simply calculated as the value of the stock (or any other securities) on the day of the donation.
It is an added advantage if donors give stocks that they have owned for a long time (usually a period of more than one year). This is so because you can donate the long-term stock to charity, get a deduction equivalent to the value of the stock at the time of the exchange, and never have to pay capital gains tax on the appreciated value of the stock.
Needless to say, this is a great tax incentive to begin giving away gifts of stocks and other securities to charitable organizations.
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Establish a Health Savings Account:
There are numerous benefits to establishing a health service account. First, you never have to worry about getting sick again because your health savings account will foot all your medical bills for you. If, on the other hand, you never get sick and require medical treatment that costs money, a health service account will afford you several tax benefits.
First, a health savings account helps you reduce your tax liability by allowing you to deduct your annual payments from your income taxes each year. Additionally, all the money that you transfer to your health savings account is non-taxable.
Any withdrawals you make to pay for medical expenses are tax-free as well (except they are withdrawn for non-medical reasons), and by the age of 65 (or in the event of any disability), you can withdraw the funds in you Health Savings Account for whatever reason without any tax implications.
Are you looking for effective tax reduction strategies for high income earners that will protect your finances by reducing the amount you have to pay in taxes? Do not hesitate to call us now and schedule a free consultation.
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