High-income earners often find themselves paying a larger share of taxes due to progressive tax rates. However, with proactive tax planning, it’s possible to reduce tax liability while staying compliant with IRS regulations. This guide outlines key tax rules, bracket thresholds, and various strategies to minimize taxes effectively.
Understanding Tax Rules for High-Income Earners
Recent tax law changes impact high earners significantly, influencing retirement planning, income thresholds, and deductions. Here are some important updates:
- Required Minimum Distributions (RMDs): The age at which retirees must begin withdrawing from tax-advantaged accounts has increased to 73 (and will rise to 75 in 2033). This allows more time for tax-free growth.
- Retirement Contribution Limits:
- 401(k) and 403(b) plans: The 2025 contribution limit increases to $23,500 (or $30,500 if age 50+ with catch-up contributions).
- Traditional and Roth IRA contributions: The phase-out range for Roth IRA eligibility is now $150,000–$165,000 for single filers and $236,000–$246,000 for married couples filing jointly.
- Social Security Wage Base Increase: The taxable wage base for Social Security rises to $176,100 in 2025. Any income earned above this threshold is not subject to Social Security taxes but remains subject to Medicare taxes.
Federal Income Tax Brackets for High Earners
For 2025, the federal tax brackets for high-income earners (32%, 35%, and 37%) are structured as follows:
- Single filers: Income over $197,300 falls into the highest tax brackets.
- Married filing jointly: Income over $394,600 is subject to higher taxation.
- Capital Gains and Dividends:
- The long-term capital gains tax remains at 15% or 20% for high earners.
- Qualified dividends are taxed at these lower rates instead of standard income tax rates.
Key Tax Reduction Strategies for High-Income Earners
Maximize Contributions to Tax-Advantaged Retirement Accounts
Contributing the maximum amount to retirement accounts such as 401(k), 403(b), or traditional IRA allows high earners to lower their taxable income while growing wealth tax-deferred. Consider:
- Contributing up to $23,500 (or $30,500 with catch-up) to employer-sponsored plans.
- Investing in a Roth IRA (if eligible) or using a Backdoor Roth IRA conversion if income limits prevent direct contributions.
- Using a Self-Employed 401(k) or SEP IRA if you own a business, allowing for contributions up to $69,000+ per year.
Roth IRA Conversions
Even if you earn too much to contribute directly to a Roth IRA, you can still benefit from a Roth conversion:
- Convert funds from a traditional IRA to a Roth IRA to take advantage of future tax-free withdrawals.
- Ideal in years when income is lower to minimize conversion taxes.
Invest in Tax-Free Municipal Bonds
Municipal bonds provide tax-exempt interest income, making them an attractive option for high earners in higher tax brackets.
- Interest earned is not subject to federal income tax and, in some cases, state taxes.
- Useful for retirees looking to generate passive tax-free income.
Sell Inherited Real Estate to Take Advantage of the Stepped-Up Basis
If you inherit property, the stepped-up basis allows you to reset the property’s cost basis to its market value at the time of inheritance, significantly reducing capital gains taxes upon sale.
Donate to Donor-Advised Funds (DAFs) for Charitable Giving
High-income earners who regularly donate to charity can maximize deductions by:
- Contributing to a Donor-Advised Fund (DAF) and getting an immediate tax deduction while distributing donations over time.
- Donating appreciated stocks instead of cash to avoid capital gains taxes while receiving full deductions.
Utilize Health Savings Accounts (HSA) for Tax-Free Growth
If you have a high-deductible health plan (HDHP), you can contribute to an HSA, which provides:
- Tax-deductible contributions
- Tax-free investment growth
- Tax-free withdrawals for medical expenses
- Contribution limits are $4,150 (individual) and $8,300 (family) in 2025.
Take Advantage of Tax-Preferred Investments
- Invest in Qualified Dividend Stocks to benefit from lower tax rates.
- Use Tax-Loss Harvesting to offset gains by selling underperforming stocks.
Consider Changing Your State Residency to a No-Income Tax State
States like Florida, Texas, Nevada, and Tennessee do not levy state income tax. If you’re approaching retirement or have remote work flexibility, consider moving to reduce state tax liability.
Prepay Property Taxes and Maximize Deductions
- The SALT (State and Local Tax) deduction remains capped at $10,000, but prepaying property taxes before year-end can help optimize deductions.
Contribute to a 529 College Savings Plan for Education Savings
- Contributions grow tax-deferred and can be withdrawn tax-free for educational expenses.
- Many states offer tax deductions or credits for contributions.
- Excess 529 funds can now be rolled into a Roth IRA (subject to limits), providing another retirement savings vehicle.
Advanced Tax Planning Considerations
Income Splitting Strategies
- High-income earners can shift income to family members in lower tax brackets through gifting strategies or family business structures.
Establishing a Charitable Remainder Trust (CRT)
- Allows donors to contribute assets, receive an income stream, and get an immediate tax deduction while benefiting charities in the future.
Qualified Opportunity Zone (QOZ) Investments
- Investing in Opportunity Zones can provide capital gains tax deferrals and potential tax-free appreciation.
Final Thoughts
High-income earners can significantly reduce their tax burden with proactive strategies, from maximizing retirement contributions to investing in tax-efficient vehicles. Working with a tax professional or financial advisor ensures that your tax plan aligns with your financial goals while staying compliant with evolving tax laws.