Business

Tax Strategies All High-Income Earners Should Know

Paul watson 1 year ago 2 min read

Having to pay a chunk of your income as taxes can be disheartening. It can be difficult to avoid taxes, and you should never use illegal methods to do so. Hiding income or committing tax fraud can lead to imprisonment and hefty fines. If you are a high earner with a huge business, there are certain strategies you can use to ward off some taxes.

There are various ways even high-income earners can escape taxes. The key is knowing the tax laws and planning everything well in advance. A CPA in Troy, MI, is equipped with all the tax knowledge and can tell you how you can legally reduce the amount you pay in taxes. Meanwhile, here are some strategies you can practice if you do not have a CPA.

Tax strategies all high-income earners should know

Invest in municipal bonds.

Municipal bonds can be thought of as loans you lend to the government over a period of time. Once the bond reaches its maturity age, you get all the money back with interest. The income from investing in municipal bonds is exempted from federal taxes and in some places, at state and local levels as well.

However, the interest you gain is not much. Still, you can think of it as a savings account where you can store your money (while earning some as well).

Max out your retirement accounts.

Putting money into your retirement accounts, such as your 401(k) or other employer-sponsored accounts, can reduce your taxable income. The funds you put into your retirement accounts are not taxed until you withdraw the money years later, reducing the amount you pay in taxes yearly. When you withdraw this money, the taxes will be calculated much lower.

Donate more to charity.

One of the most popular tax-saving strategies is donating money to charities. Charitable cash donations can be deducted up to 60% of your adjusted gross income. For example, if you have an AGI of $100,000 and donate $60,000 or less to charities, you can deduct the entire charitable amount from your taxable income. However, cash contributions are capped at 60%, while non-cash ones are at 30%.

Long-term capital gains.

Investing in long-term capital gains, such as mutual funds, bonds, stocks, and real estate, can provide tax advantages. If you hold on to a capital asset for longer than a year, you can enjoy favorable tax rates of 0%, 15%, or 20%, depending on your income. You receive ordinary income tax rates if your asset is held for less than a year.