Tax Strategies for High Earners: Common Ways to Keep More of What You Make

As income rises, taxes can become one of your largest expenses. High earners face higher marginal tax rates, potential additional taxes on investment income and limits on certain deductions and credits. The good news is that many legal strategies can help high earners reduce their tax burden and keep more of what they earn. Tax rules change often, so work with a tax professional and check irs.gov for current details.

Max out tax-advantaged accounts

Tax-advantaged accounts are among the most powerful tools for reducing taxes.

Workplace retirement plans, like 401(k)s and 403(b)s, let you contribute pre-tax dollars, reducing your taxable income now, with taxes deferred until withdrawal. Contributing the maximum allowed each year can provide significant tax savings for high earners in high tax brackets. After age 50, catch-up contributions allow you to save even more, and some plans allow higher catch-up contributions for people ages 60 to 63. Under recent law, some high earners may be required to make catch-up contributions as Roth contributions.

Health savings accounts, if you have an eligible high-deductible health plan, offer triple tax advantages: contributions are tax-deductible, growth is tax-free and withdrawals for qualified medical expenses are tax-free. HSAs can also serve as an additional retirement savings vehicle if you pay current medical costs out of pocket and let the account grow.

Deferred compensation plans, offered by some employers to highly compensated employees, let you defer a portion of your salary or bonus to future years, potentially when you’re in a lower tax bracket. These plans carry risks, such as being subject to the employer’s creditors, so understand the terms carefully.

Roth options for high earners

High earners often can’t contribute directly to a Roth IRA because of income limits. A backdoor Roth IRA, which involves contributing to a traditional IRA and then converting it to a Roth IRA, may be an option. Be aware of the pro-rata rule if you have other pre-tax IRA balances.

Some workplace plans allow a mega backdoor Roth, using after-tax contributions beyond the regular employee limit and converting them to Roth, potentially allowing substantial additional Roth savings.

Roth 401(k) contributions, available in many workplace plans without income limits, are another option, though they don’t reduce current taxable income.

Having a mix of pre-tax and Roth accounts provides tax diversification in retirement, giving you flexibility to manage taxable income.

Invest tax-efficiently

Asset location, placing different investments in the accounts where they’re taxed most favorably, can reduce taxes. Hold tax-efficient investments, like broad index funds and ETFs, in taxable accounts, since they tend to distribute fewer capital gains. Hold less tax-efficient investments, like taxable bonds or actively managed funds, in tax-advantaged accounts.

Use tax-loss harvesting to offset gains, selling investments at a loss to offset capital gains and up to $3,000 of ordinary income each year, with additional losses carried forward. Be mindful of the wash-sale rule.

Consider municipal bonds, whose interest is often exempt from federal income tax and sometimes state income tax, making them attractive for investors in high tax brackets. Compare tax-equivalent yields to evaluate whether municipal bonds make sense for you.

Hold investments over a year to qualify for lower long-term capital gains rates.

Be aware of the net investment income tax, a 3.8% tax on investment income for people with income above certain thresholds.

Give strategically

Charitable giving can reduce taxes while supporting causes you care about. Donate appreciated stock instead of cash to avoid capital gains tax on the appreciation while potentially deducting the fair market value, within IRS limits.

Use a donor-advised fund to bunch several years of giving into one tax year, allowing you to itemize deductions in that year, and then recommend grants to charities over time.

After age 70½, qualified charitable distributions from IRAs can go directly to charity, are excluded from taxable income and can count toward required minimum distributions once they begin.

Charitable remainder trusts can provide income, a partial deduction and a way to diversify appreciated assets.

Strategies for business owners

Business owners may have additional options. Retirement plans for the self-employed, such as solo 401(k)s, SEP IRAs and defined benefit plans, can allow large tax-deductible contributions. Choosing a tax-efficient business structure, such as an S corporation, may reduce self-employment taxes in some situations. The qualified business income deduction may reduce taxes on income from pass-through businesses, subject to limits. Hiring family members, timing income and expenses, and properly deducting business expenses can also help.

Other strategies

State taxes can significantly affect high earners. State income tax rates vary widely, and some states have no income tax.

Timing income and deductions, such as deferring bonuses or accelerating deductions, can help manage tax brackets across years.

Estate planning strategies, such as annual exclusion gifts and trusts, can reduce future estate taxes for those with large estates.

Plan year-round

The best tax planning happens throughout the year, not just in April. Many strategies, such as tax-loss harvesting, charitable giving, retirement contributions and Roth conversions, must be completed by year-end. Meeting with a tax professional during the year, especially before major financial events like selling a business, exercising stock options or receiving a large bonus, can help you identify opportunities and avoid surprises.