The High-Stakes Game of Tax Planning
If you’re one of the many high-income earners out there, tax season can feel like a never ending battle to keep more of your money in the bank. It’s like trying to hold onto a bucket of water with a hole in it – no matter how hard you try, it just keeps slipping away. But here’s the thing: smart tax planning isn’t just about playing catch up in April. It’s about being proactive all year round to lower your taxable income, boost your long-term savings, and stay on the right side of the taxman.
At Accounting & Tax Advisers CPAs, we’ve helped tons of high-earners in Lombard, Illinois and beyond develop customized tax strategies that really work. Whether you’re a business owner, exec, investor, or self-employed pro, the right plan can make a world of difference.
Here are the key deductions, deferrals, and smart moves high earners need to know about to make tax planning a part of their wealth-building strategy:
1. Max Out Your Retirement Contributions
One of the best ways to reduce your taxable income is to contribute to a retirement account, especially ones with tax-deferred growth.
For 2024 and 2025, you can put in:
- Up to $23,000 in a 401(k) if you’re under 50, or $30,500 if you’re 50 or older (including catch-up contributions). That’s a heck of a lot of money you get to keep in your pocket.
- $7,000 to a traditional IRA (if you’re eligible), or $8,000 with catch-up at 50. Again, every little bit counts.
- Up to 25% of your compensation (up to $69,000) to a SEP IRA if you’re self-employed. That’s a big chunk of change right there.
If your income is too high for a traditional IRA deduction, consider a backdoor Roth IRA strategy, which lets you convert after-tax contributions into a Roth for future tax-free growth.
Higher earners should also explore Solo 401(k) or Defined Benefit Plans, which allow for a whole lot more in contributions depending on your income and age.
2. Invest with Tax Efficiency in Mind
Taxes can really chew up your investment returns – unless you invest with tax efficiency in mind. Here are a few tricks to keep in mind:
- Use tax-loss harvesting to offset capital gains. Selling off losing investments before year-end can save you a pretty penny.
- Hold onto investments long-term to qualify for lower long-term capital gains rates (generally 15-20% vs. ordinary income rates). That’s a nice chunk of change you get to keep.
- Put income-generating investments (like bonds or REITs) in tax-deferred accounts. It’s a no-brainer.
- Invest in municipal bonds, which often generate federal – and sometimes state – tax-free interest. That’s a pretty sweet deal if you think about it.
Our team can work with your financial advisor to look over your portfolio and spot opportunities to reduce your investment-related tax exposure.
3. Give Back – and Get Something in Return
Giving back to the community can also give you a tax break – if done strategically.
High-income earners can benefit from:
- Donor-Advised Funds (DAFs) – Contribute a big chunk of money in a high-income year and distribute it to charities over time. You’ll get a full deduction in the year you contribute.
- Charitable remainder trusts (CRTs) – Receive income for a set time, with the remainder going to charity, allowing for a partial deduction and income deferral. It’s like getting a present and a tax break all at once.
- Donating appreciated stock – Avoid capital gains tax and get a deduction for the full market value. It’s like getting something for free.
Just make sure your charitable giving is part of your broader financial and estate plan. We can help you structure gifts in ways that maximize impact while minimizing tax.
4. Get Your Business Structure Working for You
Many high earners also run businesses or earn self-employment income. In these cases, your business structure is a key part of your tax strategy.
A few ways to optimize:
- Elect S Corporation status (if it’s right for you) to reduce self-employment taxes on a portion of your income.
- Deduct home office, business travel, and health insurance premiums if you’re self-employed. It’s like getting free money.
- Utilize Section 199A (Qualified Business Income Deduction) for eligible pass-through income (up to 20% deduction, with income limits and phase-outs). That’s a nice chunk of change right there.
We do entity structure reviews to ensure you’re using the most tax-efficient business setup – and can adjust it as your income grows.
5. Plan for AMT and NIIT
High earners often face extra taxes beyond the standard income tax, including:
- Alternative Minimum Tax (AMT) – A parallel tax system that removes lots of deductions. Tax planning can help you avoid AMT triggers like large state and local tax deductions or incentive stock options.
- Net Investment Income Tax (NIIT) – Another type of tax that hits high earners hard. We can help you plan around it to minimize your exposure.
- Net Investment Income Tax (NIIT) – A 3.8% surtax on the passive income that probably sneaks up on most of us – interest, dividends, capital gains, and rental income – for the folks with a MAGI over $200,000. That’s $250,000 for married couples.
Getting your planning ducks in a row, especially when it comes to investment income and the timing of your transactions, can really make a difference in how much of these nasty added tax layers you end up paying.
6. Consider Postponing Income Until Next Year
If you’re about to jump into a higher tax bracket or think you’ll be making less cash next year, it might be worth putting off income into the following year. Think about it – things like:
- Holding off on that end of year bonus payment or invoicing until after the holidays
- Putting off selling that asset until January to see if rates might go down
- Running some deductions into the current year to make a difference
We run tax projections in Q4 to help our clients figure out which moves make sense now and which to leave for later. Timing it right can really move all the pieces into a more tax-friendly position.
7. Don’t Leave It to Tax Season
High earners often make the biggest mistake by putting tax planning on the backburner until tax season rolls around. By then most of the chances to reduce your liability have come and gone.
At Accounting & Tax Advisers CPAs, we’re all about year-round tax planning – we want to help you build a smart tax strategy that’s on point with your income and goals, not just file your returns.
Work Smarter, Not Just Harder
Making a lot of money is a pretty big deal – but the real challenge is keeping hold of it all. With some expert guidance and a plan that’s custom-made just for you, you can reduce your tax bill, protect your assets, and position yourself for long term financial success.
If you’re ready to take your tax strategy to the next level, we’re here to listen. At Accounting & Tax Advisers CPAs, we’ve got tax planning and consulting services for high-income individuals in the Lombard, Illinois and surrounding areas. Click here to schedule a meeting with us.