As a DINK couple, you may find yourself and your partner in the enviable position of earning high salaries. While having a high income is a nice reward for hard work, drawbacks exist. One of the biggest is the amount of taxes that you have to pay. However, you can utilize tax strategies of high-income earners to limit the tax burden you face.
What Are the Tax Strategies of High-Income Earners?
What follows are tax strategies that some high-income earners utilize. However, lawmakers change tax codes regularly, both temporarily and permanently. Your best bet is to talk with your accountant and financial advisor to get their input based on the current year. You should have this conversation yearly, well before the end of the calendar year.
Invest in a Tax-Deferred Retirement Savings
Because any investment you make into your IRA (excluding a Roth IRA), SEP, or 401(k) is invested before taxes are taken out of your paycheck, you reduce your current taxable income and, therefore, your tax burden for this year. However, when you retire and withdraw the money, you will need to pay taxes. You’re not avoiding taxes using this strategy; you’re just deferring them.
Donate Cash to a Charity
If you itemize your tax return, you can reduce your tax burden by giving a gift of cash to a charity (or charities) of your choice. The law allows you to give up to 60% of your adjusted gross income and deduct it on one tax return. Any more than that and the donation will be carried forward on future tax returns.
However, in 2021, The Taxpayer Certainty and Disaster Tax Relief Act of 2020 allows individuals to give 100% of their adjusted gross income to a charity (or charities) during 2021. (This is ONLY for 2021 and only applies to your 2021 tax return.)
Take a Qualified Charitable Donation
If you are over 72 years old (and thereby required to take an IRA withdrawal), you can make a Qualified Charitable Donation and give money to your favorite charity straight from your IRA account (SEP or SIMPLE IRA excepted).
Doing so serves three purposes.
First, you give to a charity, which helps the charity and likely makes you feel good.
Second, you meet your required withdrawal for the year.
Third, you reduce your tax burden because the money goes straight to a charity, so it does not appear as income on your tax return.
Use a Health Savings Account (HSA)
If you have a high-deductible insurance plan, you can put some of your money in Health Savings Accounts for retirement and medical purposes. You are allowed to put in $3,600 per individual per year and $7,200 for families in 2021, and $3,650 and $7,300 for families in 2022. This money is put in the account before taxes, lowering your taxable income.
You can use the money to pay for medical and dental expenses, including some over-the-counter medicines. However, if you withdraw the money to pay for expenses outside the approved ones, you will need to pay taxes on the money you take out.
There are many strategies high earners use to lower their tax obligations. These are just a few. Talk to your accountant and financial planner to get strategies unique to your situation and finances.