When you earn a lot of money, you pay a more considerable percentage of taxes than if you make a lot of money. Of course, there are exceptions, but generally, those who earn more pay more. And, if you’re high income, you could believe you don’t have an option — that you have no choice except to accept an increased tax burden. Is this, however, the case?
Tax regulations change regularly, and the rising complexity makes it difficult for high-income earners and those with a high net worth to keep up with the latest tax methods.
While the worry of tax season may never go away, there are tax-saving tactics you may use to alleviate your worries and reduce your stress levels when that time of year arrives.
What is the most effective approach to lower taxable income?
Your taxes will become more complicated as you earn more money. So, if you make more than the average person, it’s critical to have the appropriate person on your side to find out how to lower your income taxes. There are several things you may do to reduce your tax liability in addition to taking your standard deduction and other deductions.
Anyone in the top three tax categories is considered a high-income earner. That means you’re a high-income earner if you make more than $170,050 in gross income as a single person or $340,100 if you’re married and filing jointly. You must grasp the fundamentals of taxes, beginning with tax brackets.
Not to be confused with adjusted gross income, your federal tax bracket is the percentage of tax you owe the IRS on each tier of your taxable income. A person’s adjusted gross income (AGI) is defined as their total gross income minus any IRS-allowed above-the-line deductions.
On the other hand, taxable income is adjusted gross income minus personal exemptions and itemized deductions (sometimes known as below-the-line deductions). High-income earners should always know how their next dollar will be taxed.
Understanding the Secure Act
Several significant changes affect tax reduction measures for high-income individuals.
- In 2020, the age for Required Minimum Distributions, or RMDs, was raised from 70 to 72 years old.
- In 2022, the annual contribution limitations for 401(k)/403(b) plans and SIMPLE IRAs have been raised to $20,500 for 401(k)/403(b) plans and $14,000 for SIMPLE IRAs.
- Traditional IRA contributions are no longer restricted by age.
- The income limit for Roth IRAs has been raised. Singles’ contributions phase out between $129,000 and $144,000 MAGI, and married couples file jointly between $204,000 and $214,000 MAGI.
- The phaseout zone for conventional IRA contributions for an uncovered spouse has also been raised to $204,000-$214,000.
- In 2022, the Social Security pay base was raised to $147,000. This is the maximum amount of income subject to social security taxation.
- Long-term care premiums can now be deducted up to $5,640 per person for 70 and up and $4,520 for those aged 60 to 69. As a result, in 2022, a married couple can deduct up to $11,280 in long-term care insurance premiums.
– Make the Most of Your Retirement Funds
Organization accounts, such as 401(k) and 403(b) plans, make it simple to reduce your taxable income. Every dollar you put into these accounts isn’t taxed until you take the funds, which lowers your tax burden each year you contribute.
The advantage is that if you wait until after you’ve retired to take money out of your 401(k), your income will be lower because you won’t be earning a salary. What’s the result? You will be taxed at a lesser rate.
– Place the appropriate assets in the proper accounts.
To manage your tax liability:
- Use an asset location plan.
- Put high-yielding assets like real estate investment trusts (REITs) and taxable bonds into tax-advantaged accounts.
- Consider taxable accounts for investments that yield lower tax costs, such as municipal bonds and stock index ETFs.
-Roth IRA Conversions
Take advantage of the Tax Cuts and Jobs Act’s lower rates before they expire in 2025. Pay taxes now at what may eventually be lower marginal rates than you’ll face when you remove money in the future. This can assist you in accumulate tax-free money for your future needs or passing it down to your children.
Distributions from traditional IRAs are taxable as ordinary income, whereas eligible Roth IRA withdrawals are tax-free.
-Donate and repurchase
Giving to charity has inherent benefits and current (and future) tax advantages. Instead of sending cash, you can maximize your charitable giving deduction by providing valued stocks. Charities do not pay taxes on stock sales. Thus they receive the total value of the shares as a donation. After giving the stocks, you can repurchase them at a better price than when you first bought them.
Wealth management is a difficult task. It takes more than just identifying the correct tax reduction techniques for high-income earners to guarantee that your money is working for you in the most efficient way possible. The difference has the appropriate financial advisor.