A higher income may mean that you pay more taxes, both at the federal and state level. Graduated tax rates at the federal level, and even at the local level, can take a bigger chunk of your income as you move up the income ladder. But by familiarizing yourself with the rules, you can optimize the tax strategy and save more of your money. A financial advisor who has tax planning expertise can optimize your financial plan in order to minimize your taxes.
What Is Considered High Income?
For many people, a high-income can mean different things depending on where they live and their unique circumstances. High-income earners typically make $500,000 per year or more. It’s possible to technically meet the IRS definition for a high income earner, even if you don’t realize it.
According to the IRS, a taxpayer is considered as a high income earner if they report taxable income of at least $200,000 in Adjusted Gross Income (AGI) or $250,000 in Total Positive Income (TPI) on their tax return. A TPI is a sum of the positive amounts reported for each course of income on an individual tax return.
Federal Income Tax
The federal tax bracket you are in is the amount of tax that you owe the IRS, based on certain ranges of taxable income. Your taxable income is your AGI, less any itemized or standard deductions you claim.
The highest tax bracket for the 2025 fiscal year is 37%. This bracket will apply to taxable income for single filers in 2025 that is greater than $626,350 ($609,350 in 2024) or married couples filing jointly who have a taxable revenue of $751,600 ($731,200 in 2024).
Tax Savings Strategies for High-Income Earners
In general, reducing your tax bill if you earn more money doesn’t mean applying just one single method. You can try a variety of tactics to reduce your tax bill. You can perform some of them yourself, while others may require your financial advisor’s assistance. Here are the best ways for high-income earners to reduce their tax burden.
1. Fully Fund Tax-Advantaged Accounts
Maximizing tax-advantaged accounts can reduce your annual taxable income. You may be able to lower your tax bracket by reducing the amount of taxable income that you report. You may want to max out the following accounts:
- Traditional 401(k), or similar workplace plans
- Traditional IRA
- SEP IRA
- Flexible Spending Account (FSA), a Health Savings Account (HSA).
You can make catch-up payments to IRAs and workplace plans if you are 50 or older. HSAs allow catch-up contributions starting at age 55. Also keep in mind that the amount you can deduct for traditional IRA contributions will vary depending on whether or not you and your spouse are covered by a workplace retirement plan.
2. Consider a Roth Conversion
Roth IRAs offer 100% tax-free qualified distributions during retirement. As a high-income earner ,you may not be able to make a Roth IRA contribution if your income is above a certain level. However, you can convert assets from a traditional IRA to a Roth IRA.
On your tax return for that year, you would have to pay the tax due on the conversion. You can make withdrawals of qualified amounts from your Roth account in the future without having to pay income tax. You can also avoid required minimum distributions starting at the age of 73 (75 for those born after 1960).
3. Add Money to a 529 Account
A 529 College Savings Account is a tax-advantaged account that helps you pay for educational expenses. Federally, the money you deposit is not deductible. However, some states offer tax breaks for 529 contributions. The money in the account is tax-deferred, and withdrawals for eligible education expenses are tax-free.
Contributing to a 529 may not affect your current income tax situation, but can have a positive impact on your estate tax liability. You can, for example, contribute five times your annual gift tax exemption limit to a 529 at one time. This would remove the contributions from your gross taxable estate.
4. Donate More to Charity
Contributions to charity are a popular way for high-income earners to save on taxes. IRS rules allow you to deduct up to 60% of your adjusted gross income as charitable contributions. The deductions for non-cash assets are limited to 30%.
You can take advantage of charitable tax deductions in several ways, including
- Donating cash directly to an eligible charity
- Capital gains can be avoided by donating appreciated assets such as stocks.
- Setting up a charitable remainder trust or a charitable lead trust
- Establishing a donor-advised fund
- Taking a Qualified Charitable Distribution (QCD) from an IRA
If you are over 73 years old and do not need to take RMDs from a traditional IRA, you may want to consider the last option. IRA owners who are over 70.5 years old can make a donation of up to $100,000 each year through a QCD . This can reduce their taxable income. Remember that you don’t get to claim this amount the same as a charitable contribution. If you want to deduct other cash donations or assets that are not in cash, you will need to itemize these on Schedule A.
5. Review and Adjust Your Asset Allocation
It’s important that you allocate assets to the best places. Some investments are more tax-efficient. It’s generally a good idea to place more tax-efficient funds, such as Exchange-Traded Funds (ETFs), in your taxable account and reserve higher-impact funds for a 401(k), IRA or other retirement plan.
Consider investing in municipal bonds that are tax-exempt to reduce your taxes. These bonds’ interest income is not included in the Medicare surtax calculation and is also exempt from federal income tax. Municipal bond income may be exempt from state income taxes.
Remember that you can also use tax-losses to your advantage. Harvesting losses is the act of selling investments at a profit to offset capital gains. Net losses up to $3,000 can be deducted from your regular income. Losses that you do not harvest during the current year of taxation can be carried over to future years.
6. Alternative Investments
Certain investments may help you defer tax when you earn more income. Cash-value life insurance, for example, allows you to build up cash value within your policy. The money grows tax-free. When withdrawals do not exceed the amount you paid in premiums, they are tax-free.
Annuities can be a part of your overall tax management strategy. You can purchase a contract for a deferred indexed annuity with payments that will begin in the future. The value of the annuity continues to grow tax-deferred. The income tax will be paid on withdrawals at a later date, but this strategy can pay off if your tax bracket is expected to drop by the time of retirement.
7. Maximize other deductions
You can deduct interest on a home mortgage. State and local property taxes are also deductible. These expenses may not seem like a big deal, but they can help reduce your tax bill.
If you itemize, you can deduct medical costs in excess of 7.5% from your AGI. This could be a valuable tax deduction if your family or you incurred significant medical costs during the year.
Bottom Line
Tax-saving strategies can help you owe the IRS less each year if you are a high-income earner. Remember that tax laws are always changing. What works now might not work in three or five more years. You can avoid losing out on savings opportunities by regularly reviewing your tax situation.
