Tax-Saving Strategies for High-Income Earners

Historical insight — Originally published April 10, 2023. Preserved as historical content; information may have changed.

With a higher income comes higher taxes. And while you may assume that those hefty tax bills are just the price to pay (quite literally) for your income level, it’s not necessarily the case.

No matter how high your tax bracket is, there are a number of strategies that can help you reduce your tax bill. Here are five of our favorites.

Maxing out your tax-advantaged accounts and investments (any account that offers tax benefits) like 401(k)s, IRAs, and HSAs works to lower your tax bill by reducing the amount of income you’re taxed on. Increasing your retirement plan contributions to, for example, your 401(k), 403(b), or other workplace plans, means your taxable income is reduced at paycheck level. These accounts are tax-deferred, so your contribution and any gains are only taxed when you withdraw the money.

Traditional IRAs generally offer tax-deferred growth, not tax-free growth. Depending on the taxpayer’s circumstances, contributions may be fully deductible, partially deductible, or nondeductible, and distributions may be fully or partly taxable. Eligible HSA contributions may be deductible or excluded from income, earnings can grow tax-free, and distributions used for qualified medical expenses can be tax-free.

Depending on your age, you can make catch-up contributions to all three financial vehicles. For workplace plans and IRAs, they’re allowed for those aged 50 and over, and 55 and over for HSAs. The aim of catch-up contributions is to make up for any years you weren’t able to contribute quite as much, making it easier for you to max out those accounts.

The payment for a municipal bond, or ‘muni’, is a loan from the investor to the issuer (often a state or local government) that funds projects and expenses. In return for the initial investment, you receive regular interest payments until the bond matures and the initial investment is repaid to you.

In terms of tax savings, the income from munis (including interest payments) isn’t subject to federal taxes. In fact, in some states, munis aren’t taxed at all – although in others, investors will pay state or local taxes.

Whether or not this tax-saving strategy works for you will depend on your unique circumstances, bearing in mind, of course, that munis often earn less income than other taxable bonds. If you’re not sure whether it’s worth making a part of your overall investment strategy, calculating a muni’s tax-equivalent yield helps you compare potential returns with those of a taxable bond.

Donating to a donor-advised fund (DAF) is something we often discuss with our high-income earning clients, particularly those looking to combine tax savings with charitable giving. Specifically created to manage charitable donations, they deliver an immediate tax deduction to the donor in the tax year the fund is set up, up to 60% of adjusted gross income. With the money then held indefinitely, you decide when the charities of your choice receive contributions.

As a DAF reduces your tax bill for the tax year you fund it in, it’s a particularly smart strategy to use in the event of a windfall or higher than usual annual income. Plus, it gives you the opportunity to support charitable causes at the same time as saving money on taxes.

Paying for your children’s future education is a crucial part of your overall financial plan and one that can also help you save on taxes. Funding 529 college savings accounts lets you save towards your children’s college expenses with tax benefits. While your contributions will still be federally taxed, some states offer tax breaks on them. The invested money grows on a tax-deferred basis, and as long as you use withdrawals for qualified educational expenses, those withdrawals are tax-free.

For high earners looking to reduce their estate tax liabilities as well as benefiting from a tax-advantaged vehicle, 529 plans deliver obvious benefits. Contributions can be up to five times the annual gift tax exclusion, meaning your 529 contributions are removed from your taxable estate.

Your overall investment strategy will be one that’s unique to your own circumstances, preferences, and risk tolerance. For higher earners, looking beyond the stock market to alternative investments can really benefit your tax situation. Opportunities such as cash value life insurance, deferred annuities, real estate, and fine art can all be included in your tax-saving plans.

Working out which investments to consider and strategies to implement to best manage your hard-earned dollars can be complex. At CG Financial, our team will work alongside your tax preparer to manage and monitor your portfolios to make sure you don’t miss out on tax-saving opportunities. Talk to one of our team today to find out how you can save more on your taxes.

The information in this material is not intended as tax advice. Please consult a tax professional for specific information regarding your individual situation. Advisory Services offered through CG Advisory Services, an SEC Registered Investment Adviser.