Tax Planning Strategies for High-Income Earners
Good tax strategies for high-income earners is an important part of financial management. It helps you to save money and file your taxes in a way that will reduce your tax liability.
What is Tax Planning?
Tax planning may be different for every individual. There are many factors that can influence what tax planning strategies are best for you, such as your income, investments, and deductions. The goal of tax planning is to minimize the amount of taxes you owe the government or maximize the amount of money you get back from the government through a refund.
Why is Tax Planning Important?
Tax planning is important because it helps to reduce your tax burden. It also helps you to save more money than you would otherwise, but most importantly it can help you to create an actionable path forward in creating and sustaining wealth.
One of the big secrets to creating real generational wealth that isn’t often taught in schools is creating tax plans that take advantage of a multitude of legal options to decrease your liability and increase the money you can keep in your business, or in your pocket.
Many of the wealthiest people in the world are able to maintain that wealth because they have specific ways they spend or invest their money that allows them to take advantage of certain perks in the tax system.
Tax Scenarios to Consider for High-Income Earners
Let’s take a look at some of the most common tax scenarios for high-income earners and how you can best plan for them.
The first step to take is to figure out which filing status you qualify for. If you are married and file jointly with your spouse, then your filing status is either married filing jointly or head of household. If you are unmarried but live with a qualifying child all year, then your filing status is single.
If you have a spouse who also earns income, then your combined income must be above $300k in order to qualify as high-income earners. If you are over this threshold, many new tax code benefits start to become available to you that don’t typically apply to the average earner.
There are too many variables and options to list in one blog, but the simple idea here is that you need to have an expert looking at those options and helping you make the best decisions. It isn’t always necessary for the average person to hire a CPA, but if you are a business owner or a high-income earner, this becomes an important part of the process.
The IRS doesn’t typically come out and tell the average citizen about all the additional ways they can be benefitting from the tax code. These options aren’t usually laid out for all to see, unless you know exactly what you are looking for.
In the vast majority of scenarios, the cost of having a team of experts to help manage your taxes and create strategies to grow your wealth is offset almost immediately by the money you are able to save. They will be able to seek specific advantages that you otherwise may not have known existed, and can implement strategies according to your specific situation.
Tax Saving Strategies for High-Income Earners
High earners need to be cautious about the tax implications of their investment strategy. With the combination of tax deduction, credits, and contribution strategies, it is possible to pay less in taxes. The following are some tips on how to save taxes as a high-income earner by making smart investments.
- Alternative Investments
Certain tax-deferred investment options can be considered when you earn a higher income. One such option is cash-value life insurance, where the accumulated money grows tax-free.
- Invest in mutual funds and exchange-traded funds.
- Use Health Savings Account
Consider investing your HSA contributions for the long term. Contribution limits depend on your health plan, age, and other factors. With an HSA, you will receive a triple tax benefit of tax-deductible contributions; earning grows tax-free, and tax-free withdrawals for qualified medical expenses in the future!
- Set up a donor-advised fund to maximize charitable contributions and take advantage of tax savings opportunities and deductions on your tax return.
- Tax loss harvesting
- Contributing to a qualified retirement plan and contributing the maximum amount to your retirement accounts
- Convert to a Roth IRA
In this case, you’re trading the current tax benefit to subject to lower your taxable income for the benefit of a tax-free income in the future. Roth distributions are tax-free and will not increase your modified adjusted gross income (MAGI).
Everyone has a unique financial situation that requires custom strategies to fully maximize. If you are a high earner but feel like you could be using your money in better ways, we are confident we can help guide you down the right paths to financial freedom and true growth. Explore these tax strategies for high-income earners further, so you will know which one works best for you. Talk to ProVision Wealth today!
Investment Strategies for High-Income Earners
If you are a high earner, you should know the tax implications of your investments. There are several points that you should consider before investing in the stock market.
The first point is to consider your tax bracket. If you are in the top marginal income tax bracket, then your main concern will be capital-gains taxes. If you are in a lower income tax bracket, then it would be more beneficial for you to invest in stocks because of the low capital gains tax rates on long-term investments. But each person’s situation can vary quite a lot, which is why it is so important to partner with a CPA that understands your goals and can help navigate this process with you.
High Income Is Not The Same as Wealth
One of the most common misconceptions about finance is that simply having a healthy income means you are wealthy. The biggest difference between being a high-income earner, and having actual wealth, is how hard that money works for you. Simply hoarding dollars in a bank account may feel nice, but if your money is sitting in a bank it is being wasted.
There are many ways to turn cash into real wealth. Some common methods are smart and calculated investments, choosing the right retirement fund, and understanding how to take advantage of things such as life insurance and debt, to generate exponential growth with less risk.
Find the best ProVision Tax Strategy today!