Tax Reduction Strategies for High-Income Earners
4 Ways to Reduce Your Taxable Income
Tax planning is one of the most important aspects of financial planning for individuals approaching or in retirement. It is, therefore, advisable to work towards minimizing your tax liabilities so that your plans are sustainable and consistent with your retirement goals. Here are four tips that you can easily implement to reduce your taxable income and get the best from your financial planning.
1. Know Your Tax Bracket
This is the first step in any financial planning process to include taxes as an important factor. The U.S. has a progressive tax system in which more income is taxed at higher rates than at lower rates. This helps identify where your income falls so that you can look for ways to lower your taxable income while at the same time keeping more money in your bank account.
For instance, tax planning may involve scheduling receipt of income, deferring payment of earnings, or reporting capital gains over a number of years to remain in a specific tax bracket. These strategies are particularly important during retirement when withdrawals from retirement accounts can push you into a higher bracket.
2. Maximize Charitable Contributions
It should be noted that charitable giving is not only good for the community it benefits, but it is also a sound financial decision that can lower your taxable income.
Try to use the following approaches to the maximum:
Give Appreciated Assets: Rather than bringing cash, donate common stock or other property that has increased in market value. This way you avoid paying capital gains taxes and can claim the full value of the donation.
Qualified Charitable Distributions (QCDs): If you are 70 ½ or older, you can donate a part of your RMD to a charity and reduce your taxable income.
Donor-Advised Funds: These accounts enable you to make a significant number of contributions during high-income years and, in the meantime, receive tax exemptions for distributing funds to charities at different times.
3. Contribute to Tax-Advantaged Accounts
High income earners have the advantage of using important tools like retirement plans that defer taxes and health savings accounts. These strategies enable you to cut down on your taxable income and at the same time build up for the future.
Retirement Accounts: In 2024, you can contribute up to $23,000 to a 401(k) or similar employer-sponsored plan, plus an additional $7,500 catch-up contribution if you are 50 or over.
HSAs: If you have a high deductible health plan, you can contribute up to $4,150 for an individual and $8,300 for a family in 2024. If you are over 55, you can contribute an extra $1,000.
These strategies also assist in reducing your taxable income while ensuring that you are financially ready for retirement expenses.
4. Use Tax-Loss Harvesting
Investment losses are not always negative. Tax-loss harvesting enables you to trade securities in a way that allows you to offset taxable profits from other positions in your portfolio.
For instance, if you have made profits from other trades, you can counterbalance them by selling losing positions. This way, you can reduce your taxes without jeopardizing your overall investment strategy. Reinvesting the tax savings back into your portfolio can only help to quicken your financial growth.
A Comprehensive Approach to Financial Planning
Reducing your taxable income is only one piece of the financial planning equation. From retirement planning strategies to understanding the tax consequences, it is important to have a holistic plan to succeed in the long run. Whether you are getting ready for retirement, are in retirement, or just want to improve your financial planning skills, working with a certified financial planner will make a big difference.
At Falcon Wealth Planning, we specialize in explaining complex financial matters to our clients in plain English. Schedule your free financial assessment today and let us show you how to make better financial decisions for a better future.
*The content in this blog is for general informational purposes only and does not constitute personalized financial, investment, tax, or legal advice. Falcon Wealth Planning, Inc., a fee-only, true fiduciary, registered investment advisor, provides this information to give a broad understanding of financial concepts and strategies.