How To Reduce Taxable Income for High Earners: 10 Strategies

9.5 MIN READ

Making more money is great until you see how much of it goes to taxes. If you're a high earner, you might be watching 30% or more of your income go straight to the IRS.

It's frustrating, to say the least, so you're probably wondering how to reduce taxable income for high earners. Here are 10 smart tax-saving strategies that'll allow you to keep more of what you earn.

What Is Considered a High Earner?

There's no rigid definition of a "high earner," but you're generally considered one if your taxable income exceeds $191,950 as a single taxpayer. At this level, you enter the 32% tax bracket - meaning every additional dollar you earn is taxed at least 32%.

Here's how the tax brackets break down for single taxpayers in 2024.

2024 tax rates for a single taxpayer

If you earn $300,000, you'll pay different tax rates on different portions of your income. The first $11,600 is taxed at 10% ($1,160), then from $11,601 to $47,150 at 12% ($4,265), and so on. In total, you'd pay approximately $77,664 in federal taxes - about 26% of your income.

For H1B visa holders, who often work in high-paying tech and specialized positions, this usually means paying between 20-35% of their income in federal taxes.

This doesn't include state income taxes, which can add another significant percentage depending on where you live.

How To Reduce Taxable Income for High Earners: 10 Smart Strategies

1. Maximize Your Retirement Contributions

One of the best strategies for high-income earners is to maximize your retirement contributions. Every dollar you put into a traditional 401(k) or IRA reduces your taxable income for that year.

If your employer offers a 401(k), this should be your first stop. The money goes in pre-tax, grows tax-deferred, and reduces your taxable income. Plus, if your employer offers matching contributions, that's essentially free money you don't want to leave on the table.

You don't have to stop at your employer's match. If you can afford it, contribute up to the annual limit.

And if you still have money to save after maxing out your 401(k), consider opening a traditional IRA for additional tax benefits.

These contributions reduce your taxable income now, but you'll pay taxes when you withdraw the money in retirement. The idea is that you'll likely be in a lower tax bracket then.

Related Article | Should I Invest in a 401K on a Work Visa?

2. Contribute to a Health Savings Account (HSA)

A Health Savings Account (HSA) has many benefits for high-income earners. The contributions are tax-free, the money grows tax-free, and the withdrawals for qualified medical expenses are tax-free as well.

To use an HSA, you need to have a high-deductible health plan (HDHP).

If you do, maxing out your HSA contributions is a smart move. Unlike Flexible Spending Accounts (FSAs), HSA money rolls over year after year. You can even invest it for long-term growth.

3. Make Strategic Charitable Donations

Charitable giving can help reduce your tax bill. However, to maximize the tax benefits, you need to be strategic about how and when you give.

First, your total deductions (including charitable donations, mortgage interest, state and local taxes, etc.) need to exceed the standard deduction. If they do, every charitable dollar you give reduces your taxable income.

Use these strategies for tax savings:

Bunch multiple years' worth of donations into a single tax year to exceed the standard deduction
Donate appreciated stocks or assets instead of cash (you avoid capital gains tax and get a deduction for the full market value)
Set up a Donor-Advised Fund (DAF) to bunch multiple years of charitable contributions into one year while spreading out the actual charitable giving over time

Also, make sure you're giving to qualified charitable organizations that are eligible for tax deductions.

Related Article | Qualified Charitable Contributions

4. Take Advantage of Tax Loss Harvesting

Tax loss harvesting is a sophisticated way to turn market downturns into tax advantages.

When investments in your taxable accounts decline in value, you can sell them to realize the loss. You can use this to offset capital gains and reduce your taxable income.

You can use investment losses to offset capital gains from other investments, reduce your ordinary income by up to $3,000 per year, and carry forward additional losses to future tax years.

It's important to avoid the "wash sale" rule. Don't buy the same or a substantially identical investment within 30 days before or after the sale. Instead, you can buy a similar (but not identical) investment to maintain your market exposure while still claiming the tax loss.

For example, if you sell a technology ETF at a loss, you could immediately buy a different technology ETF with a similar investment objective. This maintains your market position while still capturing the tax benefit.

5. Invest in Municipal Bonds

States, cities, and other government entities issue municipal bonds to fund public projects like schools, hospitals, and roads.

When you buy a municipal bond, you're essentially lending money to the government entity, and they promise to pay you back with interest over a set period.

You won't pay federal taxes on the interest payments, and buying bonds from your own state can eliminate state taxes as well.

Municipal bonds typically offer lower interest rates than taxable bonds, but their tax-free status can make them more valuable for high earners in high tax brackets.

Think about the "tax-equivalent yield" when comparing municipal bonds to taxable investments. This tells you what a taxable investment would need to yield to match the municipal bond's after-tax return.

6. Take Advantage of All Tax Deductions

You probably already know about major deductions that you could qualify for to reduce your taxable income, but there are also a few less-known ones that could offer substantial tax savings, such as:

Investment management fees
Home equity loan interest, when used for investment
State and local taxes (SALT) up to the limit
Mortgage interest on primary and secondary homes
Medical expenses that exceed a certain percentage of your income

A tax professional can help you find deductions you might miss on your own.

7. Set Up 529 Plans for Your Children

A 529 plan is a tax-advantaged investment account designed specifically for education expenses. Recent changes allow you to use up to a certain amount per year for K-12 private school tuition as well as college education, making 529s even more versatile.

Contributions aren't deductible from your federal income taxes, but many states offer tax deductions or credits for 529 contributions.

Plus, the real benefit comes from tax-free growth and tax-free withdrawals for eligible educational expenses.

8. Try Donor Advised Funds

A Donor Advised Fund (DAF) is like a charitable investment account that offers immediate tax benefits and allows you to make grants to charities over time.

You can contribute cash, stocks, or other assets to the DAF. You get an immediate tax deduction for the full contribution, and the funds can be invested and grow tax-free. You can recommend grants to charities whenever you're ready.

9. Sell Real Estate You Inherited

When you inherit property, its tax basis is adjusted to the fair market value at the date of the previous owner's death. This can potentially help you save on capital gains taxes if you sell.

You're only taxed on the appreciation from the date of inheritance, not from the original purchase price. So, selling soon after inheritance minimizes any additional appreciation and potential capital gains.

For example, let's say you inherit a house that your parents bought for $300,000 in 1990. At the time of inheritance, the house is worth $1.2 million. If you sell the house six months later for $1.25 million, you'll only pay capital gains tax on $50,000 (the appreciation between inheritance and sale) rather than $950,000 (the total appreciation since your parents' purchase).

10. Work with a Tax Professional

A qualified tax professional can help you figure out a tax planning strategy that works best for your unique situation and adjusted gross income.

They know all of the recent tax laws and can help you maximize tax deductions, your investment income, and other aspects of your tax liability.

Related Article | The Difference Between 401K and 403B

So, How Do High Earners Pay Less Tax?

According to research, 18% of US adults make over $100,000 a year and could be considered high earners. As you start to earn more and more, it becomes more and more important to lessen your tax burden.

No single strategy will help high-income earners reduce their taxable income - you should combine multiple strategies to work together, ideally with the help of a knowledgeable tax professional.

You'll likely start with the basics, like maxing out your 401(k) and HSA, and then layer on investment strategies like municipal bonds, tax-loss harvesting, and more. Your tax professional can also help you figure out how to use your financial situation (ex, inherited real estate) for the most benefits.

FAQs

How To Legally Reduce Taxable Income?

The most straightforward ways to reduce your taxable income are through tax-advantaged accounts like 401(k)s and HSAs and by claiming all eligible deductions. If that doesn't give you enough of a tax break, you can explore more advanced tax-saving strategies, such as tax loss harvesting, investing in municipal bonds, and setting up 529 plans for your children's education.

How Can I Reduce My Taxes If I Make Over 100K?

Focus on maxing out pre-tax retirement accounts and HSAs first - these give you immediate tax savings at your higher tax bracket. Then look at investing strategies like municipal bonds for tax-free income and strategic tax-loss harvesting. If you own a home, your mortgage interest and property taxes can help you itemize deductions.

Does Roth IRA Lower Taxable Income?

No, Roth IRA contributions don't lower your current taxable income because they're made with after-tax dollars. The benefit comes later. Your withdrawals in retirement, including all earnings, are completely tax-free. If you want to reduce current taxable income, contribute to a traditional IRA instead (subject to income limits for deductibility).

Does Mortgage Interest Reduce Taxable Income?

Yes, mortgage interest can reduce your taxable income, but only if you itemize deductions and your total itemized deductions exceed the standard deduction. You can deduct interest on up to $750,000 of mortgage debt for homes purchased after December 15, 2017 (or $1 million for older mortgages).

How To Save Tax on a 200K Salary?

It's important to combine multiple tax-saving strategies. Max out your 401(k), HSA if eligible, and traditional IRA if you qualify. You can also think about setting up a donor-advised fund for charitable giving and getting municipal bonds for tax-free investment income. Make sure you're taking full advantage of all of your tax deductions and work with a knowledgeable tax professional.

The Bottom Line

Smart tax planning helps you understand and use legitimate tax benefits that are available to you. Retirement accounts, HSAs, 529s, municipal bonds, Donor Advised Funds (DAF), and other strategies can all help you keep more of your hard-earned money.

Make sure to work with a qualified professional who can help you create a legal and functional strategy to reduce your taxable income as a high-earner.