Big Tax Saving Strategies for High Income Earners

The most effective tax-saving strategies for high income earners focus on minimizing taxable income through smart planning and strategic deductions.

If you are a business owner or employee who earns high income, you may pay a higher percentage in taxes compared to people who make an average income. 

As a high earner, you might think you are stuck paying high taxes. But is that really true?

The quick answer is no. 

The IRS says you have the right to reduce, avoid, and minimize your taxes by legitimate means.

By following the prescribed methods – taking deductions, credits, using loopholes, etc. – you can legitimately reduce your tax burden.

Read on as we cover how these tax saving strategies for high income earners can benefit you in the long run.

Reducing Your Taxable Income is the Key to Reducing Your Taxes

When reducing taxes, most strategies focus on one thing – reducing your taxable income.

The more you earn, the more taxes you pay, especially once you move into higher tax brackets.

Fortunately, the tax code provides legal ways to lower your taxable income, reducing your tax bracket and corresponding tax bill.

Let’s review some tax saving strategies for high income earners that may allow you to accomplish this.

Defer Income or Income Deferrals

Postponing taxable income can be a smart way for high income earners to lower their tax bills and grow their savings.

By delaying income to future years, you can lower what you pay in taxes now while growing your investments without being taxed immediately.

For instance, you can defer income through various retirement plans, health saving plans, and deferred compensation plans. 

Maximize Retirement Contributions

Traditional retirement accounts like 401(k)s and IRAs allow you to defer paying taxes on your contributions until retirement. 

This can be a wise move if you are currently in a high tax bracket. 

Every dollar you contribute reduces your taxable income today, immediately helping you save thousands in taxes.

Here is an example:  If you are in the 35% tax bracket and put $20,000 into your 401(k), you could save about $7,000 in taxes this year.

You will pay taxes later when you take the money out in retirement, but ideally at a lower tax rate than you are paying now.

The key is taking advantage of that upfront tax break while deferring income to years when you will likely be in a lower tax bracket. 

This can be one of the most effective tax saving strategies for high income earners, especially those looking to reduce their current year’s tax liability while planning for the future.

Contribute to Health Savings Account

HSAs offer multiple tax benefits, making them one of the most effective accounts for high-income earners.

First, contributions are tax-deductible, which can reduce your taxable income.

For those in high tax brackets, the upfront deduction is valuable.

Second, investments within an HSA grow tax-free, amplifying compounding returns over time.

Lastly, withdrawals are tax-free when used for qualified medical expenses.

This allows you to pay tax-free deductibles, copays, dental, vision, and even some long-term care premiums.

Maxing out contributions annually from ages 25 to 65 and investing could easily create a tax-free retirement healthcare account over a million dollars.

With these tax advantages, an HSA can be among the smartest tax saving strategies for high income earners. 

Use Deferred Compensation Plans

If your employer offers a deferred compensation plan, you will be able to lower your taxable income this year and build your post-retirement savings.

The key benefit is being able to postpone paying taxes on a portion of your income until the money is withdrawn, typically in retirement. 

Income deferred through this plan is not subject to income tax in the year earned and deferred.

By deferring income to future years, you can potentially reduce your overall lifetime tax burden. 

Deferrals allow you to spread out income over multiple tax years, rather than having it all taxed during your high-income years. 

This makes deferred compensation one of the most strategic tax saving strategies for high income earners who are looking to minimize taxes during peak earning periods.

Many companies offer non-qualified deferred compensation (NQDC) plans that allow deferrals of a portion of salary, bonuses, commissions, and other compensations. 

The deferred amounts go into an account to be invested and grow tax-deferred until distribution in retirement or a specified future date.

For highly compensated employees, maxing out deferrals to NQDC plans and other tax-advantaged accounts like 401(k)s should be a priority to legally reduce taxes in your high-earning years.

Deduction Strategies

If you earn a high income, you can lower your tax bill by using tax deductions. 

Deductions reduce your taxable income, helping you keep more of your earnings.

In the following sections, we will share strategies designed to help you pay less taxes and build long-term wealth.

Maximize Individual Deductions

As a high-income earner, it is important to take advantage of all available deductions to reduce your taxable income. 

While many taxpayers simply claim the standard deduction, carefully reviewing your potential itemized deductions can yield significant tax savings.

Qualifying deduction categories:

• Medical/Dental Expenses 
• State and Local Taxes (SALT) 
• Mortgage Interest
• Charitable Contributions  
• Theft and Casualty Losses

Here are some key areas to pay close attention to:

• Medical: Includes out-of-pocket costs, miles driven, and specialized equipment.
• Taxes paid: Deduct state income, property, and vehicle taxes as allowed.
• Mortgage interest: Deduct interest on mortgages and home equity loans.
• Charitable: Keep receipts for cash and non-cash donations to charities.
• Miscellaneous: Unreimbursed business expenses, tax preparation fees, and investment costs may qualify.

Proper documentation is crucial in the case of an IRS audit. 

Keeping thorough records allows you to properly deduct legitimate expenses and reduce your taxable income as much as legally possible. 

Create Large Charitable Contributions

High-income earners seeking effective tax reduction strategies might consider making large charitable contributions through Donor Advised Funds (DAFs) or Private Family Foundations (PFF). 

These giving methods support charitable causes and provide significant tax benefits, making them a strategic choice for those looking to manage their tax liabilities while contributing to the greater good.

Donor Advised Funds (DAFs)

DAFs serve as a tax-efficient way to give to charity. 

By making a large, one-time contribution to a DAF, you can receive an immediate tax deduction in the year the contribution is made. 

This is especially beneficial  if you have a high-income year and need to offset a substantial amount of taxable income. 

The funds can then be distributed to charities over several years, allowing you to plan your charitable giving without pressure to immediately decide on the recipients. 

This flexibility makes DAFs an attractive option for those who wish to balance their philanthropic impact with their financial planning needs.

Private Family Foundations

Setting up a PFF offers a more controlled approach to philanthropy.

While the setup and maintenance require more involvement and resources, they provide significant tax benefits and greater oversight over how the funds are used. 

Contributions to these foundations are tax-deductible, and the assets in the foundation grow tax-free. 

Incorporating charitable giving into your overall financial strategy ensures that your philanthropic goals are met while optimizing long-term tax benefits.

Leverage Business Write-Offs

Most people pay taxes before they get paid and use what is left to pay their expenses.

But there is a way to flip this.

You can get paid first, write off your expenses, and only pay tax on the leftover income. 

To do this, you should earn income outside of a traditional full-time job, whether that is from a side gig, freelance contract, trade, or business.

Basically, the government wants people to start businesses, create jobs, and grow the economy.

They provide tax breaks to incentivize more of this behavior, allowing you to write off any expenses you incur that are deemed ordinary and necessary. 

This may include portions of your:

• Home expenses
• Car expenses
• Travel expenses
• Meals
• Health insurance

Furthermore, this provision also allows you to create tax deductions to reduce your income.

We see people buy cars, hire family members, spend more on advertising, etc., to create tax deductions that lower their taxable income.

When you are classified as a business owner, you are in charge of your tax planning and the amount of taxes you pay.

Furthermore, this provision also allows you to create tax deductions to reduce your income.

We see people buy cars, hire family members, spend more on advertising, etc., to create tax deductions that lower their taxable income.

When you are classified as a business owner, you are in charge of your tax planning and the amount of taxes you pay.

Create Real Estate Losses to Offset Income

Real estate investors often use the clever strategy of claiming “paper losses” to lower the amount of taxes they owe. 

These paper losses mostly come from owning rental properties and are accounting losses from depreciation deductions – not actual cash losses.

Moreover, when rental properties are profitable and increasing in value, investors can still use these paper losses to offset their taxable income from other sources like W-2 wages or business income.

Depreciation deductions make this possible.

This deduction enables investors to report a loss on the property for tax purposes, even when the property is generating positive cash flow.

So, while it may seem counterintuitive to claim losses on profitable properties, depreciating real estate is just one of the useful strategies investors employ to minimize taxes each year.

Investment Strategies

Invest for Long-Term Capital Gains 

The amount of taxes owed on capital gains greatly depends on the length of time an asset was held prior to being sold. 

If your goal is to pay the least amount of taxes, then transitioning from short-term to long-term capital gains may be most beneficial.

• Short-term gains: (assets held for one year or less) are taxed like regular income up to 37%.
• Long-term gains: (assets held for over a year) are taxed at lower rates, 0%, 15%, or 20%, depending on your income.

By holding assets for more than a year, high-income earners can benefit from the reduced long-term capital gains tax rates compared to their ordinary income tax rates. 

If it does not hurt your overall plan, waiting to sell can save you a lot on taxes.

Time Your Investment Gains

In addition to focusing on long-term capital gains, you may further minimize your taxes by carefully timing when you realize those gains.

Capital gains are only taxable when you sell your investments.

And the tax rate you pay will vary based on your income that year.

Therefore, taxpayers can create tax savings by simply choosing the optimal time to sell their investments.

You can choose to realize your gains when your tax is the lowest.

For instance, the tax rates for long-term gains — 0%, 15%, and 20%.

You may be taxed at either of those rates based on your income, as illustrated in the chart below.

The rate you will pay depends on your taxable income.

For 2025, the rates are:

Tax rate	Single	Married filing jointly	Married filing separately	Head of household
0%	$0 to $48,350	$0 to $96,700	$0 to $48,350	$0 to $64,750
15%	$48,351 to $533,400	$96,701 to $600,050	$48,350 to $300,000	$64,751 to $566,700
20%	$533,401 or more	$600,051 or more	$300,001 or more	$566,701 or more
Short-term capital gains are taxed as ordinary income according to federal income tax brackets.

Taxpayers with a 20% tax rate may opt to sell their investments during a year when their gains are taxed at 15%.

Taxpayers with a 15% tax rate may opt to realize their gains when they are in a 0% tax rate, if reasonably possible.

Correctly timing your investment gains can result in substantial tax savings, especially for those in the higher income brackets.

Borrowing Against Your Investments

When you own investments, such as stocks, bonds, or other securities, selling them typically results in a taxable event—specifically capital gains tax if the asset has appreciated in value. 

However, if you borrow against these investments instead of selling them, you can avoid capital gains tax. 

You can use your investment portfolio as collateral to get a loan, giving you access to cash without selling your assets or interrupting their growth.

For example, say you own $500,000 in stocks that have increased over the years. Instead of selling them and triggering a large capital gains tax bill, you use a $100,000 line of credit against your investment portfolio.

By not selling your stocks, you avoid triggering a tax bill and pay no tax on the proceeds from your line of credit.

This strategy allows your investments to continue working for you while you get the necessary liquidity.

Benefits of this include:

• No current capital gains taxes: By borrowing, not selling, you defer taxes that would typically be due if you cashed out investments.
• Lower taxes later: If you wait and sell investments until you are in a lower tax bracket (like after retirement), you could pay much less in capital gains taxes.
• Growing investments: Your portfolio stays invested and grows tax-deferred, compounding your wealth over time.
• Tax deductible interest: If you use the proceeds to invest into other business ventures or investments.

Instruments you can use to borrow against your investments include SBLOCs, HELOCs, margin loans, and other lines of credits where you pledge assets as collateral.

Tax Loss Harvest When Possible

Tax loss harvesting occurs when you sell investments to recognize the tax loss.

Every time you sell something, you create a taxable event.

If you profit from the transaction, you will have a capital gain.

If you lose money on the transaction, meaning you sold it for less than what you purchased it for, you will have a capital loss.

Hence, tax loss harvesting is the process of gathering up all of those losses in your portfolio, selling them to create the taxable event, and using the tax loss to offset your income.

The goal here is to take advantage of your investments’ decline in value.

By selling them, the IRS recognizes those losses.

The following are some key points to keep in mind when harvesting tax losses:

• Only applies to taxable accounts like individual brokerage accounts. Tax-advantaged accounts like 401(k)s and IRAs are already tax-deferred, so there is no need to harvest losses.

• Most beneficial for high-income investors in upper tax brackets. The higher your marginal tax rate, the more you can potentially save by using losses to offset gains.

• Losses can offset an unlimited amount of gains plus $3,000 of ordinary income per year. Excess losses get carried forward.

• Must follow wash sale rules – cannot re-purchase the same or a “substantially identical” investment within 30 days before or after the sale.

The tax savings from loss harvesting can be significant, especially for active investors and high-net-worth individuals.

Taking losses each year helps minimize the tax drag on your portfolio returns.

While it can be frustrating to take losses, there is a silver lining in turning them into a tax benefit. 

For high-income earners, it is a strategy worth reviewing annually.

Earn Tax-free Income

One of the best tax saving strategies for high income earners is to build wealth through sources of tax-free income.

This allows your money to compound rapidly by avoiding a tax drag. 

Here are some key options to consider:

Roth retirement accounts 

Roth retirement accounts can be great for building wealth because they allow your money to grow tax-free. 

Unlike traditional retirement accounts, which offer an upfront tax deduction but require you to pay taxes on withdrawals later, Roth accounts allow you to contribute after you have paid taxes. 

You contribute to a Roth IRA or 401(k) using after-tax dollars, allowing your investments (stocks, mutual funds, or ETFs) to grow tax-free. 

When you withdraw those funds in retirement , you owe zero taxes on your original contributions and their growth.

This can make Roth accounts appealing for high earners who expect to be in the same or higher tax bracket in retirement. 

For example, if you invest $10,000 in a Roth IRA today and it grows to $100,000 over the next 30 years, you can withdraw all $100,000 tax-free in retirement.

529 College savings plans 

A 529 college savings plan can grow your education savings while minimizing your tax burden. 

These accounts help you save for future education costs for your children, grandchildren, or yourself. 

Contributions to a 529 plan are made with after-tax dollars, meaning you do not get a federal tax deduction upfront. 

However, the money inside the account grows tax-deferred, eliminating annual taxes on interest, dividends, or investment gains.

When the funds are withdrawn and used for qualified education expenses, those withdrawals are entirely tax-free. 

Qualified expenses include tuition, books, supplies, and room and board for students enrolled at least half-time. 

In recent years, 529 plans have expanded to include K–12 tuition (up to $10,000 annually).

Cash-value life insurance 

Cash value life insurance, which includes whole life, universal life, or variable life insurance policies, offers a unique combination of protection and long-term tax benefits. 

Unlike term life insurance, which provides coverage for a set period, cash value life insurance includes a savings component that accumulates value over time.

A portion of your premiums goes toward insurance coverage, while the remaining amount builds cash value that grows tax-deferred.

You can withdraw funds up to your total premium contributions tax-free and take loans against the cash value without tax implications as long as the policy remains active.

Cash value life insurance can be a valuable tax reduction strategy for high-income earners. 

It can serve as supplemental retirement income, a tax-free emergency fund, or a means to fund large purchases. 

Municipal bonds

Municipal bonds are debt securities that state and local governments issue to fund public projects like schools, highways, and infrastructure. 

What can make them attractive to high-income earners is their tax-advantaged structure.

The interest earned on most municipal bonds is exempt from federal income tax. 

In many cases, if you purchase a bond issued by the state or municipality where you reside, that interest income is also free from state and local taxes. 

This tax exemption can significantly increase your effective yield, especially in a high tax bracket.

When integrated with a comprehensive financial plan, municipal bonds can help you earn a steady income while legally avoiding significant federal and state taxes.

U.S. Treasury securities, including Treasury bills (T-bills), Treasury notes (T-notes), and Treasury bonds, are backed by the full faith and credit of the U.S. government, making them some of the safest investments available. 

U.S. treasury securities

Treasury securities offer a tax advantage as the interest earned is subject to federal income tax but exempt from state and local taxes. 

This exemption can make a difference in net returns for residents of high-tax states like California or New York compared to other taxable fixed-income investments.

When combined with other tax-free or tax-deferred investments, Treasuries help preserve your wealth by minimizing the drag of state taxes, allowing more of your earnings to compound over time.

The Bottom Line for Tax Strategies for High-Income Earners

Applying these tax-saving tactics could make a huge difference in reducing your taxes each year. 

But it is important to remember that tax laws are constantly changing. 

What works now might not work in a few years. Thus, it is a good idea to regularly check your tax situation to make sure you are not missing any chances to save.

A tax professional can guide you through the complex world of tax planning and ensure you are taking advantage of the best tax-saving strategies for high-income earners.

Tax laws are complicated, but working closely with an expert can go a long way in legally minimizing the taxes you owe.

Do not leave money on the table – plan ahead and explore all your options.