As a high income earner, keeping more money in your pocket requires you to decrease your taxes.  

You can use several strategies to lower your tax bill, including: 

• Make the maximum retirement contributions

• Contribute to a health savings account

• Convert to a Roth IRA

• Buy municipal bonds

• Establish a donor-advised fund

• Tax residency planning

• Invest in qualified dividends

• Hire your children to work for your business

• Invest in 529 college fund for kids

• Make opportunity zone investments

• Take a real estate exemption or use a rollover

• Start a family

We’ll explore each of these strategies in detail below.

Who Is Considered A High-Income Individual?

According to the IRS, high-income earners are individuals belonging to the top three of the seven tax brackets. 

If you make more than $182,100 annually in the 2023 tax season (filed in 2024) as a single person, single head of a household or married but filing separately, you’re a high-income individual.

A person who is married and files jointly making more than $364,200 annually is also considered a high-income individual.

The below table summarizes the top three federal income tax brackets and taxes paid for 2023, which apply to high-income individuals.

How Biden’s Tax Plan Affects High-Income Earners

Under Biden’s tax plan, high-income earners will pay more tax. 

Biden has proposed to increase the top marginal income tax to 39.6% from 37% for single filers earning more than $400,000 annually and married couples with an income exceeding $450,000 annually.

Biden also wants to enforce a 25% minimum tax on taxpayers with a wealth exceeding $100 million. 

Another increase is the “Net Investment Income tax” (NIIT) from 3.8% to 5% on earnings of more than $400,000 on regular income, capital gains and pass-through business income. 

NIIT includes dividends, interest, capital gains, rental and royalty income. NIIT is a surtax paid in addition to regular income tax and is paid by individuals with a certain modified adjusted gross income threshold.

Biden also proposed to nearly double the capital gains tax from 20% to 39.6%, which will likely stall in a divided congress.

Tax Strategies For High Net-Worth Individuals

You can use several or all 12 strategies to reduce your tax bill.

Make the Maximum Retirement Contributions

Lowering your taxable income enables you to shift into a lower tax bracket. 

One way for high-income earners to do that is by maxing out their 401(k)/403(b) contributions. 

A 401(k) is offered by private, for-profit companies, and a 403(b) is offered by tax-exempt and nonprofit organizations such as churches. 

These retirement accounts tax the withdrawals you make in retirement and not the contributions or earnings. This defers your tax and reduces your adjusted gross income during your high income years.

The main difference between being taxed on your current income and during retirement is that the latter is likely to be lower. 

The reduction in the adjusted gross income enables you to be taxed at a lower rate today. Choosing not to max out your contributions means that the unclaimed portion will be treated as income and taxable in the year earned, placing you in a higher tax bracket.

The maximum contribution for a 401(k) and 403(b) in 2023 is $22,500 for under 50-year-olds and $30,000 if you’re 50 or older. The contribution limit increased in 2023 by $2,000 from 2022.

Employers offer a 401(k), and they are responsible for the administration of the account and its contributions. The other advantage of having these retirement accounts is that employers match a certain percentage or the entire contribution of employees.

If you contribute the maximum amount ($22,500), and your employer matches contributions 100%, your annual savings will be $45,000. Your employer’s contribution does not count toward your contribution limit. However, the total limit between employee and employer cannot exceed $66,000 annually.

What if your employer matches only 4% of your salary? 

If you make $40,000 a year, your employer’s contribution will be $1,600. You can make higher contributions than your employer while ensuring you stay within the limit.

Not only does contributing to a 401(k)/403(b) lower your gross income so that you’re taxed at a lower rate, but your retirement savings increase with your employer’s contribution.

Contribute to a Health Savings Account

A Health Savings Account (HSA) is a personal account enabling you to save for qualified medical expenses.

The 2023 contribution limit for self-only coverage is $3,850 and $7,750 for family coverage. If you are 55 years or older, you can contribute an additional $1,000.

Contributions made to an HSA reduce your gross income when made by payroll deduction, so you’re taxed at a lower rate. HSA contributions aren’t taxed, nor are the earnings and distributions when used for paying qualified medical expenses.  

You can withdraw these funds at any time to pay qualified medical expenses such as X-rays, bandages, prescriptions, dental, eye glasses, first aid supplies, and more. 

If used for other expenses, the funds are taxed as ordinary income, and a 20% penalty is imposed. Unused funds are rolled over to the next year to build the balance for medical expenses incurred at a later stage.

This strategy is useful if you want to avoid hefty medical expenses when you’re older. Building up this account at a young age enables you not to worry about such expenses later, especially in retirement when you want to enjoy your money. 

When you pass away, your HSA is transferred to your named beneficiary.

Convert to a Roth IRA

Want to enjoy more of your money in retirement? Then you need to invest in a Roth IRA because distributions in retirement are tax-free. 

A traditional individual retirement account (IRA) enables you to make contributions with pre-tax dollars and then be taxed on your withdrawals, which include all the earnings you accumulated. 

So, how do you delay taxes and not have any in your retirement withdrawals?

Convert your traditional IRA into a Roth IRA. Contribute to a traditional IRA and then roll it over to a Roth IRA, which requires contributions with after-tax dollars.

When you complete the conversion from a traditional IRA to a Roth IRA, you will be taxed. But since you decide when to do the rollover, this is a great strategy to determine when to be taxed on the contributions. Earnings and withdrawals in a Roth IRA are not taxed. 

The amount you choose to convert is added to your gross income and taxed as ordinary income. Regardless of income or filing status, anybody can convert to a Roth IRA. There is no limit on the amount of rollovers into a Roth IRA The easiest way to facilitate the process is to instruct your broker to do it.

To keep making contributions after the rollover, contribute to the traditional IRA and then do a rollover into the Roth IRA.

The maximum contribution to a Roth IRA for 2023 is $6,500 for individuals under the age of 50 and $7,500 for those 50 years or older. Whereas a traditional IRA has a required minimum distribution (RMD) at age 72, a Roth IRA does not require withdrawals until the death of the owner.

Let’s take a look at an example of how your retirement savings are affected by a traditional and Roth IRA.

Assume that you make $190,500 and are taxed at 32%, with annual IRA contributions of $6,500. In retirement, you make annual withdrawals of $50,000, placing you in a 22% tax bracket.

• Traditional IRA: Your taxable income is $184,000 ($190,500-$6,500). That means you will pay $58,880 (184,000x32%) in taxes. For your retirement withdrawals, your tax on $50,000 withdrawals is $11,000 ($50,000x22%).

  
  

• Roth IRA: Your taxable income is $190,500, so you pay $60,960 annual tax. In retirement, when you withdraw $50,000, you will not be taxed.

Buy Municipal Bonds

Bonds aren’t the most attractive investment option from an earnings perspective, but tax-exempt ones provide certain benefits. 

The interest from municipal bonds is exempt from federal tax. This asset class is usually a low-risk investment because buying one entails loaning money to a government, which pays set interest payments until the bond matures.

When the bond matures, the issuer reimburses you the original investment. The income from bonds is free from federal taxes. Municipal bonds issued by your state may be exempt from state and local taxes. 

The best way to buy municipal bonds is through a broker, which usually provides a self-directed account, enabling you to monitor prices, ratings, and execute trades.

Using your after-tax dollars to invest should be tax-free. And that’s exactly what municipal bonds provide because you don’t pay any tax on the interest earned.

You can hold a municipal bond for 1 to 3 years and even up to 30 years. 

With an investment of $100,000 and an average yield of 3%, you would make $3,000 annually, which is tax-exempt. 

Since interest is paid out every six months, your initial investment would be $134,685,50 after 10 years. 

Establish a Donor-Advised Fund

If you want to contribute to charities and enjoy tax advantages, establish a donor-advised fund. 

It provides control of your donations by enabling you to decide how and when to distribute grants to individual charities. You claim the deduction when made but decide later about its distribution.

You claim a tax deduction of up to 60% of your adjusted gross income for cash contributions to a donor-advised fund.

Here is an example:

• You made a $600,000 income and contribute $500 monthly to a donor-advised fund. In a year, your contribution is $6,000. But you can prepay for five years, resulting in a $30,000 contribution. Instead of only claiming a $6,000 donation, you can use the $30,000 as a tax deduction in the year of the contribution, lowering your taxable income to $570,000.

  
  

• So instead of being taxed at 37% on $600,000, you will be taxed at 35% on $570,000.

  
  

• Even though you contributed for five years, the donor-advised fund will distribute your $500 monthly to charities for the next five years.

This strategy is useful to high-income individuals who experienced a significant spike in their income in a particular year. You can set up a donor-advised fund through financial service companies, which will take care of all the administration.

Tax Residency Planning

Choosing where you live impacts your state taxes. Consider establishing your primary residence in a state with no income tax. This strategy is especially useful if you own property in multiple states because you’re renting them. 

States that don’t enforce an income tax:

• Alaska

• Florida

• Nevada

• New Hampshire

• South Dakota

• Tennessee

• Texas

• Washington 

• Wyoming

Wyoming is considered the most friendly tax state as it enforces a 3.9% tax of income. 

Moving to a new state, especially if you need to move back because it didn’t work out, can be burdensome if you have a spouse and children. This strategy is most suitable for single people who work remotely.

Carefully consider estate planning with a tax professional to determine which state to establish your primary residency in because it may have high tax rates for other items.

Before moving states, look into factors such as levies, property taxes, which tend to be higher in states with no income tax and sales tax.

Invest in Qualified Dividends 

Ordinary dividends are taxed as ordinary income, which max out at 37%. Instead of opting for ordinary dividends, invest in companies that pay qualified dividends—subjected to capital gains tax rate.

These are issued by a United States company or a qualifying foreign company. 

The tax advantage of qualified dividends is that their tax rate tops out at 20%. 

However, certain tax situations dictate that you may be subject to a 3.8% Net Investment Income tax (speak to a qualified tax advisor for specific details on your investments).

Investing in dividend stocks is done with after-tax dollars, and you want to keep as much of your dividends as possible by avoiding the highest tax bracket.

Here is an example:

• If you earned $10,000 of qualified dividends, you would pay 0% tax. 

• Qualified dividends are tax-free until $44,625 for a single filer. 

• Had you chosen an ordinary dividend, you would pay $1,000 in tax because ordinary income up to $11,000 is taxed at 10%.  

To buy qualified dividends, you need to open an account with a broker and place a trade on a stock offering such dividends. 

Hire Your Children to Work for Your Business

Add your children to your payroll by hiring them to work in your business. 

The tax advantage of having your children on your business’s payroll is that you can deduct their salary as a business expense, which reduces your taxable income.

This applies even if you are registered as a sole proprietor. If your child is under the age of 18, you won’t be required to pay Social Security or Medicare tax on their salary. 

This strategy is perfect if you want to shift a portion of the business’s income from your tax bracket to a child’s tax bracket.

Your child will not pay any tax on income if the annual earnings don’t exceed. $13,850. 

Let’s assume your business’s income is $185,000, and your child’s salary is $13,000. Instead of being taxed on the full $185,000, your business’s taxable income will be $172,000.

Invest in 529 College Fund for Kids

Certain states enable taxpayers to reduce their taxable income by contributing to a college fund for their children. 

The contributions aren’t tax-deductible for your federal taxes but are deductible in certain states up to $10,000 and they grow on a tax-deferred basis. Earnings and withdrawals are tax-free if you use them on qualified educational expenses.

More than 30 states offer tax deductions for 529 plan contributions, but taxpayers must contribute to their home state. Nine states offer tax deductions to any 529 plan:

• Arizona

• Arkansas

• Kansas

• Maine

• Minnesota

• Missouri

• Montana

• Ohio

• Pennsylvania

Contributions to a 529 account offer gift and estate tax benefits for federal tax purposes. 

Your contribution qualifies for a $17,000 annual gift tax exclusion in 2023. But you can treat the contribution as processed over 5 years for gift tax purposes, enabling you to make an annual contribution of up to $85,000 to be treated as an exclusion. 

Your spouse can make the equivalent contribution to your child/grandchild without triggering the gift tax.

This strategy is suitable for parents and grandparents who want to ensure their child’s/grandchild’s future by sending them to college while reducing their own estate taxes because contributions to a 529 plan are exempt from federal estate tax. 

Federal estate tax is currently applicable to estates valued at $12.92 million but may drop to $6 million by 2025. Certain states imposed state estate tax on estates worth $1 million.

Financial institutions run a state program, enabling you to choose a 529 plan, and the administrators will guide you about how to complete the application and organize your life.

Make Opportunity Zone Investments

You can use the Qualified Opportunity Zone (QOZ) program to defer paying taxes by investing in economically-distressed communities. 

Taxes on eligible capital gains are deferred, discounted or exempted on a federal level by investing the gain (not the proceeds of a sale) in a QOZ within 180 days.

Holding a QOZ investment for five years enables you to receive a 10% tax exclusion of deferred gain and an extra 5% if you hold it for 7 years. 

The growth in a QOZ investment is tax-free. The deferred taxes are paid on the earlier date of the sale of your QOZ investment or 31 December 2026. 

If you want to stimulate job growth in low-income communities, a QOZ investment is ideal for you.

To invest in a Qualified Opportunity Fund, you can fill out Form 8996 and submit it with your federal income tax return to be certified for such an investment.

Here is an example:

• Your stock portfolio’s value increased by $4 million at the time of the sale. The increase represents a capital gain, which requires a tax payment of $952,000 ($4 million x 23.8%). By allocating the gain to an Opportunity Zone, you can defer the payment to 2027.

  
  

• To receive the 10% tax exclusion, invest the $4 million into a QOZ. After holding it for 5 years, your cost basis will be $400,000 ($4 m x 10%). You can recognize $3.6 million ($ 4m- $400,000) capital gains, providing you with a tax saving of $95,200 ($400,000 x 23.8%) 

  
  

• After 10 years, the interest in the QOF has increased to $8 million. If you have paid the capital gains tax on the original $4 million by 2027, the remaining $4 million will not be subject to capital gains tax.

  
  

This strategy is ideal for multi-millionaires as you need to be an accredited investor to invest in many QOZ funds.

Take a Real Estate Exemption or Use a Rollover

Owning real estate enables you to take advantage of capital gains tax. You can reduce or defer taxes, but it depends on how you used the property. 

Selling your primary residence after two years (doesn’t have to be consecutive) of living in it out of the five years before the sale enables you to exclude up to $250,000 in gains. A married filing jointly couple can exclude $500,000.

The ownership and the use of the primary residence don’t have to be at the same time. What’s important is that you owned the property and used it for at least two years.

Another option is doing a 1031 exchange with an investment property. That enables you to invest the proceeds of the sale of the first property into a new property, enabling you to defer capital gains tax. IRS must consider the two properties like-kind.

Here is an example:

• You purchase a home (primary residence) for $400,000 and 3 years later, in a booming market, the home is worth $700,000 when you sell it. You’ve made a capital gain of $300,000. The taxable income is $50,000 ($300,000-$250,000) for a single filer.

  
  

• Considering your income is between $44,626-$492,300, your tax rate is 15%. That means the capital gains tax you will pay is only $7,500 ($50,000x15%) as opposed to $45,000($300,000 x 15%) had you not been able to take advantage of the exclusion. 

Start a Family

The federal government is rewarding taxpayers for having children with the Child Tax Credit. High-income earners receive at least $2,000 per child annually. Individuals who can take advantage of this tax relief are married couples making less than $400,000 and families with a single parent making less than $200,000.  

Here is an example:

• You and your spouse make $350,000 annually and have two children together over the age of 6. Your family is entitled to $4,000 ($2,000 per child).

• From July to December, IRS will pay $333,33 monthly into your account to deposit a total of $2,000. The other $2,000 will be a credit when you file your tax return the following year. A credit differs from a deductible because it lowers your tax bill, whereas a deductible lowers your adjusted gross income.

Frequently Asked Questions 

How do you stay out of a higher tax bracket?

Reduce your taxable income by maxing out the contributions in your 401(k), investing in a traditional IRA and then converting it into a Roth IRA, and contributing to a health savings account.

Are there specific tax breaks for those making over 100k?

Some of the tax breaks that those who make over $100k enjoy are lower rates on qualified dividends and long-term capital gains, as well as home-related deductions because they usually buy more expensive homes than average earners.