Reducing taxes is something everyone would love to do. However, with tax laws and rules changing frequently, it is hard to keep track of those changes & utilize tax reduction methods & strategies to minimize the taxes in search of tax-saving strategies for high-income earners. Current taxation is based on state, federal & local taxation methods based on individual & corporate level tax laws specific to each region.
How are Taxes Decided?
As we all know, these taxes are decided based on income, assets, properties, capital gains, and other fees paid lawfully. Typically, taxes are imposed for individuals or corporations based on their net income. In 2019, the Federal Tax system was able to raise $1.7 trillion through individual income taxes.
Current Federal Tax Brackets
USA’s current Federal tax brackets show the income brackets to which each taxpayer belongs. This taxation guide helps all the taxpayers get a good idea of how much tax amount they should be paying based on their taxable individual income & filing status.
Click Here to see the taxation index rates as of May 2021.
Unfortunately, it’s not that simple of a task to reduce the taxes. However, if you belong to the high-income earner category in the current USA taxation index, this article will be a valuable read for you. Here are the best tax-saving strategies for high-income earners!
Charities & Donations to the rescue!
If you wish to follow this tip, it will benefit you in terms of financials, goodwill & your corporation, or the business. In addition, charitable & donations you make during the financial year will be helpful in tax savings even if you are taking the standard deductions. For example, suppose you make charitable donations (itemized) in the forms of money or property towards well-known, qualified entities.
In that case, you are eligible to deduct up to 50% of your AGI (Adjusted Gross Income). In addition, non-itemized deductions are allowed up to $300 in charitable contributions. However, certain limitations will be there in deducting rates depending on the taxation rules at the moment.
Adherence to the Deadline
As a responsible individual, you should not miss out on the tax filing deadlines. Here is why! By missing out on the deadline for tax filing, you might end up paying more than you allocated for taxes. If you require more time to file your taxes due to an unavoidable situation or a delay, you may file an extension via IRS Form 4868 to ask for more time to file your taxes.
This is just an extension of time for you to prepare the taxation documents accurately. This allows getting away from any late charges or penalties applicable for late tax submissions. Make sure that your tax filing process is well in time.
The Front-loading strategy
It is crucial to understand how you can work around your cashflows & taxation. Specific methods are used in practice to ease the burden of taxes in the long run & front-loading strategy is one of them. Front-loading or bunching deductions allows you to stack multiple hypotheses into one year & push itemized deductions beyond the standard deduction level. Then, in the following year, you are allowed to file taxes bases on standard deductions. The trick is to alternate these methods each year. Front-loading or the bunching strategy will help you in lowering your tax bills in the long run.
Start Contributing to a Retirement Plan (IRA)
It is essential to focus on a retirement plan as with age. The ability to be a part of a business career by yourself will be below the required level. Experts say that one may need at least 85% of their income even after retirement. Traditional 401(K), which sponsors by your employer, might not be sufficient for a stable future.
Until the tax filing deadline approaches, you have the time to start contributing towards a traditional IRA. By contributing to an IRA, you will be able to save more on tax bills while making a worthwhile investment for your future.
Additionally, if you invest in an IRA, you can supplement your current 401 (K) & also get into more investment opportunities available in financial institutions. This opportunity to be a part of tax-free investment makes IRA a perfect strategy to reduce the tax amounts.
Start a Health Savings Plan (HSA) to Save on Taxes
HSA or a health savings plan is another perfect method to save on tax money. To have a health savings plan, you should fulfill the following basic requirements per the Coronavirus Aid, Relief, and Economic Security Act.
- Be covered under HDHP (High Deductible Health Plan).
- Should not be a part of any other health coverage plan.
- Should not claim tax returns as a dependent.
Moreover, the last-minute rule of HSA indicates that you are an eligible individual for HSA for an entire year if you are within the requirements on the 1st day of the last month of the tax year. Thus, an individual can contribute $3,550 per year.
The estimated Standard family coverage is $ 7,100. In addition, people who are 55+ years of age can contribute an additional $1000. By looking at these numbers, you can realize the potential savings on your tax bills through having a Health Savings Plan Contribution.
Tax benefits for Startups
As people with business focus initiating Startups or side hustles, they become eligible for tax reliefs and benefits. Any startup owner or businessman should not miss these benefits. For example, did you know that you can deduct costs during your startup functions from the taxes? Your startup might have expenses such as space, communication, travel, or administration.
This will assist you in lowering your tax bill by a considerable amount. However, as you grow your startup towards a larger company, you may be required to file taxes separately. In that case, you must consider the startup as a separate entity. Keep an eye out for taxation eligibility changes for startups, as they may change without prior notice. Bonus Read – How to start your own drop servicing business
Be Knowledgeable on Taxation
The necessary knowledge in taxation will always come in handy. But, unfortunately, most people end up paying more than what they should pay because they lack the basic understanding & knowledge of taxation. For example, did you know that IRS Form 1040 and the supporting forms contain many deductions & credits that can save you a lot on the tax bills you are unaware of?
Internal revenue service has a dedicated web page continuing all credits & deductions for individuals. In addition, this knowledge portal further elaborates on how beliefs work, business side deductions, Tax claims, and more. Always be mindful of taxation as a whole & keep a tab on credible sources of tax information to stay up to date on tax regulations of the country & make the maximum use of these tax-saving strategies for high-income earners.