In the United States, individuals who make $170,051 or more per year are taxed at 32%, 35%, and sometimes 37%. High-income earners tend to pay a lot more in taxes, but there are ways you can lower your tax burden. Here are 5 ways you can reduce your income taxes this year.
How to Lower Your Federal Income Tax Bill
While high-income earners may think they don’t have a lot of options to decrease their taxes, that isn’t the case. There are several things you can do to keep more money in your pocket.
1. Consider a Defined Benefit Plan
A Defined Benefit Plan is similar to a 401K, except that it has a higher annual deductible contribution limit. A small business defined benefit plan can lead to more tax savings for both the employer and employees because the responsibility is shifted away from the worker.
A properly designed defined benefit plan will outweigh the costs of providing the benefits as long as the employees are young relative to their partners. A business owner who wants to open a defined business plan for their workforce can switch their 401k to this plan fairly easily.
2. Donate to Charity
If you itemize your deductions, you can reap the tax deductions benefits while also helping someone in need. Many high-income earners will make a charitable donation by credit card because they don’t have to pay off the transaction by the next tax year to deduct it.
You can also deduct mileage (14 cents for every mile) if you drove to a qualified charitable organization to volunteer. People who take the standard deduction can also claim cash donations, but it isn’t much. You can only claim up to $600 if you’re filing as a married couple.
3. Roth IRA Conversions
Your tax-free retirement account can still reduce your tax burden, even if you’re in one of the top brackets. Unlike a traditional IRA, Roth IRA contributions are calculated from post-tax income. This means you won’t pay taxes when you withdraw, but you will before you contribute.
Any income earned on the money in your Roth IRA is tax-free. You can rollover the money in a 401k or traditional IRA into your Roth IRA and receive the same benefits. It’s recommended to do a Roth IRA conversion when you’re temporarily in a lower tax bracket or retired.
4. Invest in Dividend Paying Companies
The income you earn through your business is taxed as ordinary income, which results in your paying more in taxes. However, capital gains are taxed at a much lower rate. To get the most out of the capital gains tax, your investments need to see a profit before they’re sold.
Alternatively, you could invest in companies that pay qualified dividends. Make sure they’re qualified, as regular dividends are still taxed as regular income. The maximum tax rate for qualified dividends sits around 20% and must be reported on Form 1099-DIV each year.
5. Settle Up Your Property Taxes Early
American’s can only deduct $10,000 per year from their property taxes, but that can still save high-income earners thousands of dollars per year depending on their tax bracket. You can save more money if you live in a state that applies a deduction for paying your property taxes early.
It’s important to note that the tax debt on your property tax must be paid if you want to deduct the total $10,000 from your federal income tax. It may not be worth it to pay off your debts if you’re receiving minimal returns, so speak to a consultant before settling up your accounts. To avoid inconveniences, it is better to get tax audit support and representation that will serve as your business audit defense during n IRS or state income tax audit.