15 February 2019
In this article, we will look at some tax breaks for high-income households. First off, we will be defining high income as those in the 32% threshold tax bracket and up. A single filer reporting earnings of $157,500 or more and a married-couple filing jointly at or over $315,000. The new changes to the tax code could prove beneficial to everyone including high-income households in particular. In fact, families earning between $200,000 and $1 million will see their taxes drop an estimated 9%.[i] There are specific tax opportunities that are only available to higher tax brackets, for example lessening the influence of the AMT, alternative minimum tax, and changes to estate tax. Below are 4 other tax breaks that high-income households will want to look into.
Assets such as stocks, bonds, and real estate can receive preferential tax treatment depending on how long that asset is held. If an asset is held for one year or less, then sold for a gain, the short-term capital gain will be taxed at ordinary income tax rates. If an asset is held for more than one year, then sold for a gain, the long-term capital gain will be taxed at a maximum rate of 20%. There is a nice incentive to hold onto long-term investments since they can be taxed at a lower rate than your marginal income tax rate and cannot exceed 20%. Considering most high-income households are taxed at 32% or above, that is a sizeable difference that your wallet will feel. The higher your income the more you will save taking advantage of long-term capital gains rates. You also may want to consider selling off under-performers in your portfolio to offset any gains called tax loss harvesting. If your losses are greater than gains in a year, you can deduct up to $3,000 against your ordinary income, and carry over the excess to future years.[ii] Capital gains claims are utilized almost entirely by the high-income brackets, Americans with an annual income of $1 million or more enjoy 70% of the capital gains benefits.[iii]
IRAs have contribution limits and tax deduction limitations. That said, other types of retirement accounts do not have such income restrictions. While you may get a tax break on 401(k) contributions, you won’t for your IRA. If you own a business, you may be able to work around that by utilizing a SEP-IRA, 401k or profit sharing plan and make contributions as your own boss. 2019 will allow 25% of annual compensation or a max limit of $56,000 to such an account, and it is tax deductible as a business expense. So that may be something to look into. If you are over the age of 50, you are also eligible to make catch up contributions to your company retirement accounts that would add another $6,000 and total $62,000 in tax-deductible contributions.
Not only is giving to an IRS certified charity good for the community, but it is also good for a tax deduction. Charitable donations can be deducted up to 60% of your AGI, or adjusted gross income, which is up 10% from the previous year. There is no income limit on this deduction. Before making any donations, we recommend checking irs.gov Tax Exempt Organization Search to make sure your charity is recognized.[iv] You will also want a receipt and documentation of your donation. With the new tax laws and the higher standard deduction, many high-income people are utilizing a donor-advised fund and make larger charitable donations every other year. This strategy is called deduction bunching and enables taxpayers to ensure none of their charitable donations are lost when they take the standard deduction.
Mortgage interest deductions were designed to encourage real estate investment and give a tax break on the interest paid on a home mortgage. The mortgage interest deduction has met a new cap, the mortgage cannot exceed $750,000. But there is no income cap on taking advantage of the deductions. This new mortgage cap also applies only to new mortgages, not those from previous years. As the itemized deductions potentially are phased out for some taxpayers, the mortgage interest deduction can help high-income filers take advantage of claiming the entire amount of deductions they are eligible for and be able to continue to also claim charitable donations.
Taxes are always complicated. The higher the income, the more complicated it becomes but also the bigger the impact planning strategies like these can have on lowering your taxes. This makes proactive tax planning imperative for high-income individuals and families.
As tax focused financial advisors and IRS certified Enrolled Agents, we are uniquely qualified to help our clients with minimizing their tax burdens. Our tax focus allows us to add tremendous value to our clients by helping them reduce their tax burdens. For high-income professionals and retirees, taxes are by far their biggest expense. We prepare taxes for clients and provide professional advice year-round. For more information or to schedule a consultation please contact Accruent Wealth Advisors.