Top 10 Tax Reduction Strategies for High-Wage W-2 Earners

Taxes are an inevitable part of life, but most people would probably rather not hand over a portion of their hard-earned money to the government.

Fortunately, there are legal strategies to lower the amount you pay Uncle Sam each year. These include credits, deductions and advanced investment strategies. Let's dive in!

1. Maximize Retirement Contributions:

By maximizing your contributions to a tax-deferred plan (i.e. 401k), you reduce your taxable income for the year dollar-for-dollar! (and likely receive a company match to boot!).

2. Utilize Health Savings Accounts (HSAs):

For those eligible, contributing to an HSA provides a triple tax advantage. Contributions are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses are tax-free. And remember, invest your HSA and let the account grow for retirement medical expenses!

3. Take Advantage of Flexible Spending Accounts (FSAs):

Many employers offer FSAs, which allow you to set aside pre-tax dollars for qualified medical expenses and dependent care costs. Another way to reduce your taxable income dollar-for-dollar!

4. Optimize Tax Deductions:

Although 90% plus of filers claim the standard deduction, there are numerous deductions to consider for itemization including mortgage interest, property taxes, student loan interest, and charitable contributions.

Also, consider "bunching" your charitable contributions if you're on the margin between the standard deduction and itemizing. "Bunching” two years of charitable contributions into one year, for example, and itemizing deductions for that year while taking the standard deduction the next year could save thousands in taxes over the 2 year period.

5. Consider Tax Credits:

Tax credits directly reduce your tax liability, providing a dollar-for-dollar reduction! For example, explore tax credits for education (529 plans), child and dependent care, energy-efficient home improvements, electric vehicles, and other eligible expenses.

6. Utilize Tax-Advantaged Investments:

Not all investments are taxed equally! Like investment selection and asset allocation, the amount lost to taxes and other costs is a key factor affecting your returns.

Understand the taxes you're paying on investment accounts (interest, short-term capital gains and ordinary dividends are taxed at the marginal rate vs. qualified dividends and long-term capital gains taxed at the capital gains rate of 0%, 15% or 20%.)

7. Take Advantage of Tax-Loss Harvesting:

Tax-loss harvesting allows you to sell investments that are down (in taxable accounts), replace them with reasonably similar investments, and then offset realized investment gains with those losses. The end result is that less of your money goes to taxes and more may stay invested and working for you!

8. Plan Charitable Giving:

Donating to charitable organizations not only supports causes you care about but also provides tax benefits. And by donating appreciated assets, you can potentially avoid capital gains tax while receiving a charitable deduction for the fair market value of the asset.

Particularly high income year? Deductibility limits are 60% of AGI for cash and 30% for long-term appreciated securities—but you can then carry forward any unused charitable deductions for up to five more years. Also, consider creating a larger current year deduction by combining cash and securities. We can help!

Planning for retirement? Set up and fund a donor-advised fund now, turning your currently high tax bracket into an advantage. And don't be afraid to combine a donor-advised fund with an existing private foundation, charitable remainder trust or charitable lead trust to maximize your deductions.

9. Explore Business Ownership:

Deductions abound for high-income W-2 earners with a side business or real estate investments. We'll explore the tax benefits of a side business in a future post. See last week's article on the tax benefits of long-term rentals and a prior article the short-term rental loophole.

10. Work with a Tax Professional:

Tax reduction strategies can be complex, and are ever-changing. A CPA tax professional can provide personalized advice based on your unique financial situation!

Remember, it's essential to stay informed about changes in tax laws and adapt your strategies accordingly. With careful planning and proactive measures, you can keep more of your hard-earned income and achieve your financial goals. The Wathen Lobel Miller Schultz Group can help you minimize your lifetime tax burden!

Contact us today for a FREE, NO OBLIGATION 20-Minute Ask Anything session.? Schedule yours today!