7 TAX PLANNING IDEAS FOR HIGH INCOME EARNERS IN 2023

Why do you get up and go to work every day? Is it to provide for your family? Maintain your lifestyle? Or build to something bigger in the future? Whatever your motivations, I think that we can all agree that you will want to keep as much of your hard-earned money as possible.

This is why, whenever Uncle Sam comes to collect, most people get frustrated. Whatever your views on taxes, they are necessary to keep the lights on in the office that is this country. So, to be clear, I am by no means advocating for the outright avoidance of tax. That being said, there is a difference between paying what is rightfully owed and paying more than necessary when it comes to tax time.

As a high W-2 earner, your marginal tax rate is most likely high, so it can pay to look to reduce your taxable income as much as possible. Luckily, there are plenty of legal methods that allow you to not only reduce your tax bill today but also build your future wealth in the process. Here are 7 tax planning ideas that high-income earners can leverage for 2023 and beyond.

1. MAXIMIZE YOUR RETIREMENT CONTRIBUTION

Part of the reason that many of us work so hard is so that we can enjoy a few comfortable years of retirement. There are many ways to set these funds aside, one of which is a retirement account in the form of a traditional 401(k) or 403(b). You will likely be making a contribution to one of these already, but could it be worth squeezing a little more? Yes, when you consider that every penny that you put into these accounts isn’t taxed until the money is withdrawn from the account. There is a maximum that you can put into these accounts each year, which is currently $22,500 or $30,000 if you are age 50 or older, so it’s important to keep this in mind.

Additionally, many employers offer a match toward their employee’s contributions.  Each employer’s plan tends to be different, and it’s important to know as this is as close to “free money” as you will receive.

Putting more into your retirement not only allows you to save tax now but in the future as well. By maximizing your retirement contribution now, you’ll reduce your taxable income for this financial year. Then, you’ll most likely pay less tax when you finally withdraw these funds, as your income should be lower, and so too your corresponding marginal tax rate. This could be a win-win, as it’s a money saver and a step to building greater wealth for your future.

2. Have Your Money Work for You vs. You Working for Your Money

Different earnings are taxed in different ways. For example, your salary is taxed at the income tax rates set by the government, with the highest marginal rate currently sitting at 37%. Putting it another way, the highest income earners work for Uncle Sam from Jan 1 – May 15th!  Inspiring (sarcasm noted please)…

Unfortunately, I see many high-income earners not understand this concept and fall into the trap of working tirelessly for their money and Uncle Sam for a large portion of the year.

Did you know there could be a better way?  Did you know that capital gains, are taxed at a much lower rate of anywhere from 0-20%, and you do not have to pay the tax until the item is sold?

The trick here is to invest in assets that increase in value, which at Julius Wealth Advisors, we prefer the most profitable businesses. 

Doesn’t it sound better to grow your wealth over time as someone else does the hard work for you?

3. Give back to your Community

To me, it always pays to give back to your local community from an emotional fulfillment standpoint.  As I discussed on my latest podcast, I’ve been giving back by helping to build up the Little League in my town, while coaching my son’s team to an undefeated season.

While donating time can’t help from a tax planning standpoint, donating dollars potentially can.

There are multiple ways of donating in a way that will reduce your taxable income, say it pays to do some research and find a method that suits your goals. One example is to group your charitable donations to claim back larger deductions. By taking a proactive approach to tax planning, you can potentially help ensure that you get more from your money today, tomorrow, and beyond.

4. Begin Estate Planning

Estate taxes are often some of the largest tax bills that people receive in their lifetime. With effective planning, you can take this sting out of this bill for your family now. For example, you can gift money to members of your family. I’m sure you’re planning to leave something behind for your loved ones, and the common thinking is to leave as bigger a sum as possible. The problem is that the larger the sum, the potentially larger the bill that comes attached. If you’re going to give your family money, why not start now?

You can make annual gifts to members of your immediate family that can go towards their education, health care, or other necessary expenses. The current annual gift tax exclusion is $17,000 (or, $34,000 for married couples) per individual.  These gifts can help reduce the size of your estate now and potentially ease the estate tax your family would normally pay later down the line.

It’s important to also be aware of the lifetime gift exclusion, which currently sits at $12.92M per person (or, $25.84M per married couple).  However, this is set to be cut in more than half to about $5M in 2026. 

5. Invest in your Health

A Health Savings Account (HSA) is a savings account that can be used to set aside money before tax for qualified medical expenses. For starters, anything that you put into this account (within the contribution limit) is triple tax-free!

How do you ask? Making contributions into one of these accounts helps you to reduce your annual taxable income, you can invest the funds which grow tax-free, then if you withdraw the funds for eligible medical expenses the withdrawal is not taxed.

Furthermore, this means that you also have more money set aside to protect yourself and your family from the extreme expense of a medical emergency. At the end of the day, you can’t put a price on the protection of your family.

Oh, and one more potential benefit, any funds in your HSA that are not used once you hit 65 are treated like an IRA for tax purposes for non-medical expenses.  A potential benefit for high earners who have already maxed out their retirement plans.

6. Roth Conversions in low-income years

One of the biggest debates I often hear people have is “Do I contribute to a Roth or traditional retirement account?”  In a Roth account, you pay taxes now, your money grows tax-free, then you can withdraw tax-free. A potentially big benefit.

However, if you are a current high earner, the math typically comes down to will your marginal tax rate be higher today or when you hit financial freedom.   Once you hit financial freedom and stop working you will most likely have a much lower income.  So, that answer is usually you will have a higher marginal tax rate today, so a traditional retirement account should make sense.

Throughout your career, you might have a year when your income isn’t very high at all given a bad year at your employer, a job loss, or a career transition.  In these years, it could be smart to consider converting your traditional retirement account to a Roth as you could be in a very low tax bracket. So, you can pay income tax at this shorter-term lower rate now, let your money compound tax-free, then not have to pay taxes when you withdraw post 59 ½.   

7. Get Help

The world of tax and wealth generation can be complicated. This is why countless people around the world study and train for years to gain the knowledge and expertise that they need to properly advise people on how to manage their money - whether it’s at tax time or building sustainable wealth.

While it’s certainly possible to go it alone, this requires a lot from you. For starters, you’ll need to find the time in your busy schedule to do research and stay up to date with the very latest in all things wealth and tax. Next, you’ll need to find the time to ensure everything with your finances is managed correctly. 

All in all, this means more time out of your day spent away from your family, friends, and hobbies. This is why it can pay both now and, in the future, to get help. The right wealth advisor can help steer you in the right direction on your journey to personal wealth while working directly with your CPA to assist in ensuring that you’re getting as much out of your money as possible. Remember, asking for help is never a sign of weakness. Instead, it could be the key to unlock the door that’s obstructing you.

Final Thoughts

When it comes to your money, the more knowledge you have at your disposal, the stronger the position you should be in. When you don’t have the time to acquire the knowledge that you need, it could pay to get the right people in your corner to steer you in the right direction. When it comes to tax time, the right knowledge can help you to save money today and build toward a brighter future for you and your family. To build your future and align your tax planning with your wider financial goals, get in touch with Julius Wealth Advisors today.

Disclosures:

This piece contains general information that is not suitable for everyone and was prepared for informational purposes only. Nothing contained herein should be construed as a solicitation to buy or sell any security or as an offer to provide investment advice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. Past performance does not guarantee any future results. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. For additional information about Julius Wealth Advisors, including its services and fees, contact us or visit adviserinfo.sec.gov.