Tax Strategies for High Income Earners
by Hutch Ashoo and Chris Snyder ·Updated February 4, 2023 · 8 min read ✦
When your income exceeds a certain limit, you are subject to high taxes, which can go up to rates of 50+% of your total income. Often, this can make a significant dent in your finances, especially if most of your wealth is tied up in non-liquid assets. That is why many financial advisors specialize in developing and implementing tax strategies for high-income earners and why we highly recommend you request your free copy of this book about investment management, estate, tax and financial planning, specifically written for those looking to invest between $5 million and $500 million.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning
The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.
Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
The use of these tax strategies for high income earners is dependent on your personal circumstances, which is why you need to work with someone who is equipped to ascertain your requirements as an individual with over $10 million in liquid investable assets. Our ultimate guide to financial management includes expert guidance on choosing the best wealth manager for your unique financial situation.
Private wealth management firms like ours work exclusively with wealthy clients who have a high, very-high, or ultra-high net worth. Therefore, we have the knowledge, experience, and expertise in using tax strategies for high income earners. Clients with $5 million to $500 million in investable assets are eligible to work with our team at Pillar Wealth Management. We can help you create a comprehensive plan which covers a multitude of financial aspects that affluent families are most concerned with, from retirement planning and estate planning to tax mitigation and wealth enhancement. If you would like us to help you draft a personalized financial plan, feel free to book a meeting with our wealth managers today.
Table of Contents
In this article, we will discuss some of the smart tax strategies for high income earners, which individuals and families use to manage their taxes. We will also answer questions such as, “How do high-income earners reduce taxes?”, “What income levels pay the most taxes?”, and “Why are billionaires not taxed?”
5 Outstanding Tax Strategies for High Income Earners
- Invest in Tax-Free Saving Accounts (TFSA)
- Health Saving Accounts (HSA)
- Retirement Savings Accounts
- Making a Charitable Donation
- Tax Residency Planning
What is an effective strategy to reduce taxable income?
To reduce your taxable income, you can invest in a retirement account and contribute to a health savings account. Make charitable donations and take advantage of any tax credits that apply to you.
What are three main ways to reduce taxable income?
Three main ways to reduce taxable income are through investing in a retirement fund, taking advantage of tax deductions and credits, and charitable giving.
How do you stay out of a higher tax bracket?
Increase your contribution to a retirement account. Postpone asset sales or sell losing assets. Manage the timing of business income and expenses. Make deductible expenses in high-income years.
How can I reduce my taxable income in 2022?
Because the tax code changes every year, consider using tax software to file your taxes. Maximize your deductions and tax credits. Invest more in your retirement accounts and avoid selling assets.
What are the best tax strategies for high income earners?
Increase your investments; start a business — if you hire your family, you can deduct their retirement account contributions. Many business expenses are deductible, so be sure to track your expenses.
How can high-income earners reduce the tax burden?
Make the most of your retirement and health savings accounts by maximizing your contributions. You can get tax credits for moving to renewable energy, for your home or an electric car purchase.
What strategies will you take to reduce your taxable income?
If you want to itemize deductions, be sure to track all your expenses, such as medical bills. Plan to contribute to charity at the end of the year, which lowers your taxable income.
What tax deductions are available for high income earners?
High income earners can deduct their retirement plan contributions, health savings account contributions, charitable and trust fund donations, and mortgage interest expense.
What are the factors that are helpful for effective tax planning?
Factors to consider are sources of income, such as salaries and investment gains, whether there are medical, education, or childcare expenses, and whether there are dependents.
What are the five outstanding tax strategies for high-income earners?
Consider fully funding your retirement account, increasing your donations to charity, investing in annuities or cash value life insurance, and adjusting your asset allocation to be more tax-efficient.
1. Invest in Tax-Free Savings Accounts (TFSA)
Among the best tax strategies for high income earners is to benefit from the fact that any contributions made to tax-free savings accounts grow tax-free, and there is no tax incurred on future withdrawals. This means you can invest your money in that account and any investment income you generate will not be taxed. A few examples of these kinds of accounts are a Roth IRA and Health Savings Accounts, which we will discuss in more detail.
2. Health Savings Account (HSA)
A health savings account (HSA) is part of your retirement plan since it covers your medical bills and expenses, which your health insurance doesn’t cover. For instance, visits to dentists, eye doctors, and other medical appointments. You can opt for a high-deductible health insurance plan so that you’re able to use the money in your health savings account for co-pays and deductibles.
So, how does this reflect the use of tax strategies for high income earners? The money you put in your health savings account is exempt from federal income taxes, state or local taxes, and FICA taxes, and you won’t be taxed for withdrawing any money for your medical bills.
Wealthy investors can capitalize on these tax benefits by adding portions of their pre-tax income to their account. This will allow you to effectively manage your health costs and allow your contributions in your HAS to grow without being taxed.
3. Retirement Savings Accounts
You can include your retirement savings in your tax strategies for high income earners. Investors with a 401(k) account or an IRA (individual retirement account) can make more contributions to these accounts to reduce their taxable income and tax burden. Moreover, your balance can keep increasing with deferred taxes, similar to a health savings account.
Any investments income or capital gains you generate through your retirement account will not be taxed until you withdraw it in the future. The tax rate upon withdrawal depends on whether you withdraw your savings before or after your retirement age or at a pre-determined time.
4. Making a Charitable Donation
Philanthropy is a goal of many high-earners, not just because of the positive public image it provides them but also because of the tax benefits it brings. Whether you donate cash or securities to any charity, any capital gain will not be subject to heavy taxes. With a receipt, you can deduct your tax return and lower taxable income.
We suggest that you donate long-term appreciated assets such as real estate, bonds, or stocks. You won’t need to pay taxes on the gains they generate, and you can get a tax deduction equivalent to up to 30% of your adjusted gross income.
5. Tax Residency Planning
Wealthy investors tend to have multiple estates, properties, and businesses spread across different locations. This can open you up to dual residency and dual taxation if you don’t plan ahead. Some states charge you on any income generate through your business even if you’re not a resident of that state.
Some high-tax states charge high net worth clients with the highest tax bracket, in the form of federal tax income, real estate tax, investment income tax, and more. After you retire, you can consider relocating to a no-income tax states to save your wealth.
If you’re unsure about your residency status, you might want to consult with an expert to save yourself from the complications of dual taxation. Finding the right financial advisor who knows the best tax strategies for high income earners can be a challenging task. With a high net worth, you want someone who is capable of handling multiple assets and a high-value portfolio. For your convenience, we have written the Ultimate Guide on finding the best financial advisor for investors with over 10 million dollars in liquid assets.
Why Do Wealthy Investors Have to Pay Higher Taxes?
The progressive tax system makes sure that taxpayers are charged taxes according to their taxable income. So, if you’re wondering, “What income levels pay the most taxes?” the answer is that the higher your income level, the more tax burden you have as you enter a higher tax bracket.
Hence, knowing your taxable income can help you determine how much you owe in taxes. The taxable income can be calculated by subtracting IRS-permitted line deductions from your adjusted gross income. The resulting value will help you identify the federal tax bracket that you come under.
As a wealthy investor, you need to be aware of the types of taxes that can apply to you, as well as which tax strategies for high income earners would be beneficial in your financial circumstances. Federal or state income taxes are progressive taxes, and capital gains taxes apply on any high-value item or asset that you sell, among others.
Losing your profits to a hefty tax bill is counterintuitive to any income-generating activity you invest in. If you want to learn more about how rich families safeguard their assets, including the tax strategies for high income earners they benefit from, you can refer to our hard-cover book, 7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning – Strategies for Families Worth $25 Million To $500 Million.. It offers insights that help wealthy people live a financially secure life.
Just as investors use strategies to improve their portfolio performance and optimize their investments, tax advisors can use tax strategies for high income earners to bring down your taxes. If you’re curious about the portfolio optimization strategies we use at Pillar Wealth Management, you can refer to our comprehensive investment management guide. If you’re interested in learning about tax saving or tax strategies for high income earners, keep reading.
4 Tax-Efficient Investing Strategies for High Earners
- Family Income Splitting and Family Trusts
- Invest in Your Children’s Education
- Choosing Tax-Efficient Investments
- Invest in Dividends
In this section, we will give answers to the question, “How do high-income earners reduce taxes?” We’ll discuss tax strategies that are effective for individuals with a net worth of millions of dollars. However, you should keep in mind that in order to implement the best strategies for your profile, you need an expert’s touch. That is why we suggest that you read our Ultimate Guide for the best tips to find the right financial advisor for you.
1. Family Income Splitting and Family Trusts
This is one of the most basic tax strategies for high income earners, which you can take advantage of. It works by setting up a prescribed rate loan. When you invest in an RRSP, the amount of your contribution is deducted from your taxable income, thereby reducing your tax bill. Attribution rules can make this process a little complicated, but you can avoid that by making use of a properly structured family trust or transferring your contributions directly to your family members through a formal loan agreement. If you have more questions about how this works, you can call us up to consult with our experts!
Family trusts can help shift your investment income to your family members without being affected by a high marginal tax rate if structured properly, that is. These trusts can help you provide annual tax-free income to your family to pay for their various expenses. Trusts are among the most beneficial tax strategies for high income earners.
Another strategy you can use to provide for your slow-income spouse is by establishing a spousal loan. This will shift your investment income and capital gains to them, which will be taxed at your spouse’s lower marginal tax rate.
2. Invest in Your Children’s Education
If you want to capitalize on tax-deferred growth and government grants, you can contribute your income to a registered education savings account, which is another example of potential tax strategies for high income earners. Your balance can grow tax-free, and when you withdraw any money from the account, the income is taxed at a lower rate.
3. Choosing Tax-Efficient Investments
It should be fairly obvious that a factor in applying tax strategies for high income earners is to invest in tax-efficient securities and assets to help you generate more profits and keep them. If you’re interested in learning about other strategies that our wealth managers use to increase your capital growth, our guide talks about 5 shifts that you should be making to your portfolio.
A few examples of these type of investments include flow-through shares and life insurances. A flow-through works by investing in resource-based companies, i.e., companies involved in the explorations and development of oil, gas, renewable energy, mining, and more. With the right structure, these companies can ‘renounce’ the expenses it incurs to you, which you can then deduct on your tax return, up to the amount of the investment you made. This reduces your overall net income.
Don’t hesitate to include life insurance in your basket of tax strategies for high income earners. Life insurance policies are tax-exempt, which makes them an advantageous asset to invest in. After your death, wealth transfer can be stressful since the transfer of assets incurs tax obligations.
Tax-exempt insurance can protect the value of your assets so that more of your wealth is passed down to your beneficiaries. It covers your tax obligations, thereby eliminating the need for your heirs to sell off your estate to pay off estate taxes. To learn more about which life insurance policy is best for your financial plan and retirement planning, you should consult a financial professional. Our wealth managers are experts in the field of wealth transfer and tax mitigation, which are part of any tax strategies for high income earners. Contact us to get started on planning a financially secure future for you and your family.
4. Invest in Dividends
If you’ve ever wondered, “Why are billionaires not taxed?” the answer might lie in dividends. Most of the income billionaires have is generated through shares in a company that provides profits to its shareholders. These, along with long-term capital gains, are taxed at a much lower rate than earned income.
High Income Tax Planning
Tax Basics and 2022 Tax Legislation
Your tax bracket is the percentage of your taxable income that determines how much federal income tax you will pay. Your taxable income is calculated from your adjusted gross income (AGI). Your AGI is your gross income minus above the line deductions. Your taxable income is your AGI minus below the line deductions (standard and itemized). Once your tax is determined, you may qualify for tax credits, which will reduce your tax amount. The current tax rates will expire in 2025.
2022 Federal Tax Brackets
The following table show the tax brackets for 2022. Your income is broken into chunks for each tax rate, and then, the tax is calculated for each chunk. So, 10% up to $10,275, 12% for any amount above that but below $41,775, and so on.
|Tax Rate||For Single Filers||For Married Individuals Filing Joint Returns||For Heads of Households|
|10%||$0 to $10,275||$0 to $20,550||$0 to $14,650|
|12%||$10,275 to $41,775||$20,550 to $83,550||$14,650 to $55,900|
|22%||$41,775 to $89,075||$83,550 to $178,150||$55,900 to $89,050|
|24%||$89,075 to $170,050||$178,150 to $340,100||$89,050 to $170,050|
|32%||$170,050 to $215,950||$340,100 to $431,900||$170,050 to $215,950|
|35%||$215,950 to $539,900||$431,900 to $647,850||$215,950 to $539,900|
|37%||$539,900 or more||$647,850 or more||$539,900 or more|
Tax rates on capital gains and dividends
Use the following table to calculate the amount of tax you will pay on dividends and long-term capital gains.
|Tax-filing status||0% tax rate||15% tax rate||20% tax rate|
|Single||$0 to $41,675.||$41,676 to $459,750.||$459,751 or more.|
|Married, filing jointly||$0 to $83,350.||$83,351 to $517,200.||$517,201 or more.|
|Married, filing separately||$0 to $41,675.||$41,676 to $258,600.||$258,601 or more.|
|Head of household||$0 to $55,800.||$55,801 to $488,500.||$488,501 or more.|
The SECURE Act
The SECURE Act, passed in 2019, raised the age for required minimum distributions to 72 from 70-1/2; the limits for contributions to IRAs and 401(k) retirement plans were raised to $20,500 and $14,500, respectively. The Roth IRA income ceiling went up, and the social security wage base increased. There were changes to long-term care limits.
Above the Line Deductions
Above the line deductions reduce your adjusted gross and, therefore, your taxable income. They include all of your retirement plan contributions and your contributions to health savings accounts. Certain charitable contributions may be deducted, for example, if you are retired and make a distribution from an IRA to a charity.
Below the Line Deductions
For below the line deductions, you can take the standard deduction (based on your AGI) or you can itemize your deductions. Itemized deductions include charitable contributions, mortgage interest, and medical expenses.
Defer or Accelerate Income
Some types of income may be deferred for tax purposes, so it is taxed later in time at a lower tax rate. Similarly, some income can be taxed now rather than later, at a lower tax rate. Using the cash method of accounting, collections can be accelerated and payments deferred.
Income Tax Deferral Tax-deferred investments can be used to reduce your current-year tax bill. For example, contributions for retirement plans are taxed only when distributions are taken, when you can expect to be in a lower tax bracket. Other tax-deferred investments are education expenses and cash-value life insurance policies.
Although this is not an exhaustive list of tax strategies for high income earners, these are some commonly used methods to lower the amount you own on your tax return. For a more personalized tax reduction plan, you might want to consult a professional such as a wealth manager. At Pillar Wealth Management, we give fiduciary advice to clients with 5 million to 500 million dollars in liquid assets. We can help you capitalize on tax planning strategies suited for your unique financial profile. Contact us today to arrange your first meeting.
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We enjoy working with high net worth and ultra-high net worth investors and families who want what we call financial serenity – the feeling that comes when you know your finances and the lifestyle you desire have been secured for life, and that you don’t have to do any of the work to manage and maintain it because you hired a trusted advisor to take care of everything.
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