For individuals and businesses alike, taxes are an inevitable part of life. However, for high-income earners, the impact of federal and state taxes is significantly more burdensome due to falling into a higher tax bracket. This means a larger portion of their income is subject to taxation, resulting in a much bigger tax bill than the everyday middle-class individual. At Colorado Trusts & Taxes of Centennial, Colorado, attorney G. Deffenbaugh can provide competent and legal tax strategies for high-income earners to reduce taxes and keep more of their hard-earned money. Let’s look at a few of those strategies.
- Start a side business. If you or your spouse start a side business, this can be a powerful way to generate income and enjoy tax savings. The business must be legitimate to avoid the hobby loss rules. Business owners can deduct certain business expenses and be eligible for tax credits.
- Think about the advantages of real estate investments. Did you know that rental real estate can offer significant tax benefits for high-income earners? Rental properties often allow owners to deduct expenses such as mortgage interest, property taxes, and depreciation. If you own real estate that generates a loss for tax purposes, a detailed analysis is required for whether you can use those losses to offset your other income. It’s important to consult with a tax professional before making any investment decisions.
- Consider charitable giving. Charitable donations not only benefit those in need, but they can also provide significant tax breaks for high-income earners. By donating to qualified charities, taxpayers can receive a tax deduction if they itemize deductions on Schedule A and potentially lower their taxable income. This strategy allows individuals to support causes they care about while reducing their overall tax burden. Depending on your goals and assets, you may want to explore a donor-advised fund or a charitable remainder trust.
- Harvest capital losses. When you own publicly traded securities in a taxable account, you can sell a security, book a capital loss, and buy another security. Capital losses can offset capital gains and up to $3,000 of ordinary income. You must be aware of wash sale rules regarding the timing and type of securities you buy and sell. Under current tax law, you can harvest capital losses from cryptocurrency in a taxable account without the application of wash sale rules.
- Use retirement contributions. Another way to lower your taxable income is by maximizing your tax-deferred contributions to retirement accounts such as 401(k)s or individual retirement accounts (IRAs). There are limitations based on your income and type of account. Not only will you save for your future, but specific contributions to these accounts are tax-deductible. This means you have the opportunity to reduce your taxable income and potentially move down a tax bracket, resulting in lower taxes. You may also be able to contribute to these retirement accounts via Roth contributions. With a Roth contribution, you pay the income tax now, but the growth and distributions are tax-free if you meet certain conditions.
- Look into other tax-advantaged accounts. In addition to retirement accounts, there are other tax-advantaged accounts that high-income earners can take advantage of. Health savings accounts (HSAs) allow individuals with a high-deductible health plan to contribute pre-tax dollars towards healthcare expenses, reducing their taxable income overall. Additionally, 529 education savings plans offer tax benefits for those looking to save for their children’s future education expenses and can provide certain advantages.
- Hire a professional. Ultimately, the best way for high-income earners to reduce their tax burden is to seek the help of a qualified tax professional. This ensures that taxes are done correctly the first time and that all tax advantages are legal and appropriate in the event of an IRS audit.
Contact a professional to discuss possible ways to save on taxes!
Tax laws at both state and federal levels are constantly changing, and it can be challenging for many individuals to navigate independently. A knowledgeable attorney like G. Deffenbaugh at Colorado Trusts & Taxes can provide personalized advice and strategies tailored to your individual circumstances. Call (303) 542-7280 or complete this form to request time to talk to G. Deffenbaugh at his Centennial, Colorado, area office today.