Smart Tax Strategies for High-Income Earners

Earning a higher income can be rewarding, but it also comes with increased tax responsibilities at both federal and state levels. With a progressive tax system in place, higher income often means a larger percentage of earnings go to taxes. However, by understanding tax laws and implementing smart strategies, high earners can reduce their taxable income and optimize their financial plans. Working with a tax-savvy financial advisor can also help ensure tax efficiency.

What Defines a High-Income Earner?

The definition of a high-income earner varies depending on location and financial obligations. Generally, individuals earning $500,000 or more annually are considered high-income earners. However, the IRS defines high-income taxpayers as those reporting $200,000 or more in total positive income (TPI). TPI includes all income sources reported on an individual tax return.

Understanding Federal Income Tax Brackets

The federal tax system is structured in progressive brackets, meaning that portions of income are taxed at different rates. For 2025, the highest federal tax rate is 37%, applying to:

Single filers with taxable income exceeding $626,350 ($609,350 in 2024)

Married couples filing jointly with taxable income exceeding $751,600 ($731,200 in 2024)

High-income earners can employ several strategies to lower their taxable income and maximize savings. Here are some of the most effective approaches:

1. Utilize Tax-Advantaged Accounts

Fully funding tax-advantaged accounts is a fundamental way to reduce taxable income. Some key accounts include:

401(k) Plans: Contributions lower taxable income and grow tax-deferred.

Traditional or SEP IRA: A retirement savings option with tax-deductible contributions (income limits apply for traditional IRAs).

Health Savings Account (HSA) & Flexible Spending Account (FSA): HSAs allow tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses.

If you’re 50 or older, you can also make catch-up contributions to 401(k)s and IRAs, further increasing tax-advantaged savings.

2. Convert to a Roth IRA

Roth IRAs provide tax-free growth and tax-free qualified withdrawals in retirement. If income limits prevent direct contributions, a backdoor Roth conversion allows high earners to convert traditional IRA funds into a Roth IRA. While the conversion is taxable, future withdrawals are tax-free, and Roth IRAs do not require required minimum distributions (RMDs).

3. Utilize 529 College Savings Plans

A 529 plan is a tax-advantaged account for education expenses. While contributions are not deductible at the federal level, many states offer tax incentives. These accounts allow tax-free growth and withdrawals for qualified educational expenses. Additionally, contributions can help reduce estate tax liability by leveraging the annual gift tax exclusion.

4. Increase Charitable Contributions

Charitable giving can provide significant tax benefits. High-income earners can deduct donations of up to 60% of adjusted gross income (AGI) for cash contributions and 30% for non-cash assets. Strategies include:

Donating appreciated assets to avoid capital gains tax.

Using donor-advised funds (DAFs) to receive an immediate deduction while controlling future charitable distributions.

Setting up a charitable trust for long-term tax-efficient giving.

Qualified charitable distributions (QCDs) from IRAs (for those 70.5 or older) to reduce taxable RMDs.

5. Optimize Investment Strategies

Investing in tax-efficient vehicles and proper asset placement can help reduce tax liability. Key strategies include:

Holding tax-efficient ETFs and index funds in taxable accounts.

Placing high-tax investments (such as actively managed funds) in tax-advantaged accounts.

Investing in municipal bonds, which provide tax-free interest income at the federal level (and sometimes state level).

Utilizing tax-loss harvesting to offset capital gains and deduct up to $3,000 in losses against ordinary income.

6. Explore Alternative Investments

Some investments offer tax advantages for high-income earners, including:

Cash-value life insurance, which allows tax-deferred growth.

Annuities, which provide tax-deferred growth and allow taxable distributions in retirement when income may be lower.

7. Maximize Other Deductions

High earners should take advantage of all available deductions, such as:

Mortgage interest (on loans up to $750,000).

State and local tax (SALT) deductions, up to the $10,000 limit.

Medical expense deductions for expenses exceeding 7.5% of AGI.

Final Thoughts

High-income earners face unique tax challenges, but strategic planning can help minimize tax burdens and maximize wealth. By leveraging tax-advantaged accounts, charitable giving, smart investing, and other advanced strategies, high earners can potentially reduce their taxable income. Consulting with a financial or tax advisor can further optimize your approach.

The information presented should not be used as the basis for any specific investment or tax advice.

Investing in 529 plans involves risk, including loss of principal. Before you invest in a 529 plan, request the plan’s official statement and read it carefully.

All investments involve risks, including possible loss of principal. Alternative investments often are speculative, typically have higher fees than traditional investments, often include a high degree of risk and are suitable only for eligible, long-term investors who are willing to forgo liquidity and put capital at risk for an indefinite period of time. They may be highly illiquid and can engage in leverage and other speculative practices that may increase volatility and risk of loss.

The primary feature of whole life insurance is the death benefit.  All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values. Some whole life polices do not have cash values in the first two years of the policy. 7496976.2  Exp 04/27

Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only."