Tax Strategies For The Over $100k

Certainly, this tax season was a season of learning.  One of the areas needing attention is tax strategies for wage earners earning over $100,000.  I discovered many of my clients within this income bracket are paying more in taxes and some clients incurred outstanding tax liabilities upon tax filing.

Therefore, wage earners with incomes between $100,000 and $250,000, I am sharing several tax strategies that can help optimize your tax liabilities.  Here are some key strategies:

1. Maximize Retirement Contributions

  • 401(k) and 403(b) Plans: Contributing the maximum allowable amount ($22,500 for 2024, or $30,000 if age 50 or older) can reduce taxable income.
  • IRA Contributions: Depending on income limits, contributing up to $6,500 ($7,500 if age 50 or older) to a traditional IRA can also provide a tax deduction.

2. Health Savings Account (HSA) Contributions

  • If eligible, contribute to an HSA. Contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free. The contribution limit for 2024 is $3,850 for individuals and $7,750 for families, with an additional $1,000 catch-up contribution for those 55 and older.

3. Flexible Spending Accounts (FSA)

  • Contributing to a healthcare or dependent care FSA can reduce taxable income. For 2024, the healthcare FSA limit is $3,050, and the dependent care FSA limit is $5,000 per household.

4. Charitable Contributions

  • Donate to qualified charities and keep detailed records. Itemizing deductions may provide tax benefits if the total itemized deductions exceed the standard deduction.

5. Tax-Efficient Investments

  • Municipal Bonds: Interest from municipal bonds is generally tax-free at the federal level and possibly at the state level if the bonds are from the taxpayer’s home state.
  • Tax-Deferred Accounts: Consider investing in tax-deferred accounts, such as annuities or certain life insurance products, to defer taxes on investment growth.

6. Capital Gains and Loss Harvesting

  • Capital Gains: Long-term capital gains are taxed at lower rates. Consider holding investments for more than one year to take advantage of these rates.
  • Loss Harvesting: Offset capital gains by selling investments at a loss. These losses can offset gains and reduce taxable income.

7. 529 Education Savings Plans

  • Contributions to a 529 plan for education expenses can grow tax-free, and withdrawals for qualified expenses are also tax-free. Some states offer state tax deductions for contributions.

8. Home Mortgage Interest Deduction

  • If itemizing, deduct mortgage interest on up to $750,000 of mortgage debt ($1 million if the mortgage was taken out before December 15, 2017).

9. State and Local Tax (SALT) Deductions

  • Deduct state and local income, sales, and property taxes up to a combined total of $10,000 ($5,000 if married filing separately).

10. Tax Credits

  • Child Tax Credit: Worth up to $2,000 per qualifying child under 17, with up to $1,500 being refundable.
  • Child and Dependent Care Credit: A credit for a percentage of dependent care expenses, up to $3,000 for one dependent or $6,000 for two or more.

11. Income Timing and Shifting

  • Income Timing: Delay or accelerate income and deductions based on current and anticipated future tax brackets.
  • Income Shifting: Shift income to family members in lower tax brackets through gifts or employing family members in a business.

12. Review Tax Withholding

  • Ensure withholding aligns with expected tax liability to avoid large tax bills or refunds. Adjust W-4 forms as necessary.

13. Tax Planning with a Professional

  • Consult a tax advisor to tailor strategies to individual circumstances and ensure compliance with tax laws.

Implementing these strategies can help manage and potentially reduce overall tax liability.