If you earn a high income (or have earned significantly more this year compared to prior years), you may be looking for tax saving strategies to legally lessen your tax liability on those earnings. Here are five, easy-to-implement strategies to help you achieve that goal and keep more of your hard-earned cash at tax time:
Open A Health Savings Account
Health Savings Accounts (HSAs) are a great tax saving strategy because they are the only accounts that offer a triple tax advantage. Contributions are tax deductible, it grows tax free, and withdrawals are tax free. You can also deduct your annual HSA contributions from your income taxes each year.
Contribution limits as of 2021 are $3,600 for individuals, $7,200 for families, and $1,000 for 55+ catch-up contributions.
Set Up A Donor-Advised Fund
A donor-advised fund is a charitable fund that allows you to decide how and when to allocate funds to charities.This is probably one of the best tax saving strategies for high income earners because it allows you to take current and future year contributions and deduct them all in the current year. You’re the trustee of the account and decide how much and when charities receive donations, so you’ll always maintain complete control over your funds and how and when (and where) they are allocated.
Convert To A Roth IRA
Converting your SEP, traditional or SIMPLE IRA to a Roth IRA can help reduce taxes on future income. A Roth IRA grows tax-free and any money you take out is also 100% tax-free. Some of the best times to convert are when you’ve had a year with less income than usual. Although you’ll have to pay taxes on the conversion, the overall tax savings you will receive usually outweighs that initial cost. As always, check with your CPA or tax preparer to ensure it makes sense for you and you specific situation.
Invest In Retirement Accounts
Every dollar you invest in a retirement account is not taxed until you take it out. This reduces your annual tax burden and is one of the easiest tax saving strategies you can use. It not only sets you up for success in retirement (and ensures your money is constantly working for you). But because you’ll be in a lower tax bracket when you retire and withdraw the funds, it will also will be taxed at a much lower rate than if you paid taxes on that money as you earned it.
Invest in tax-efficient index mutual funds and exchange-traded funds (ETFs).
Every high-income earner should have a plan to diversify the taxation of income in retirement. For taxable accounts, a tax-efficient index mutual fund and/or ETF may help reduce the taxes you pay on your investments year-to-year. Index funds and ETFs can be more tax-efficient than actively managed funds.
As you can see, finding the right tax saving strategies will ensure your money is working for you in the most efficient way possible. The right tax planner really makes all the difference.
Keep in mind, tax laws change all the time, and things like your legal entity structure, eligible deductions, niche specific strategies, and more all determine how much of your hard-earned cash you get to keep.
If you’re interested in learning more about your situation and how we may be able to save on your taxes, reach out to us HERE. We offer free, no obligation tax planning consultations to see how much we can save you.
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