How To Reduce Taxable Income For High Earners: Strategies And FinTech Solutions


Jeremy BiberdorfBy: Jeremy Biberdorf

February 9, 2024February 9, 2024

For high earners looking to navigate the complexities of reducing their taxable income, the challenge often lies in identifying effective tax reduction strategies tailored to their financial landscape. While the option of hiring an expensive accountant exists, it’s not the only path to minimizing tax liabilities. There’s a practical alternative that merges convenience with cost-efficiency: leveraging financial technology.

In this context, FinTech apps emerge as a savvy choice for those aiming to manage their taxes without the hefty price tag of a professional tax consultant. These apps provide a user-friendly platform for exploring various tax-saving strategies, making it easier for high earners to implement these measures directly.

While Playbook highlights one such tool in the FinTech space, the broader implication is clear: technology offers a powerful resource for individuals seeking to optimize their tax situation independently, blending ease of use with the potential for significant financial savings.

What is A High Income Earner

According to the IRS, you’re in the high-income earner bracket if you’re making more than $182,101 as an individual or over $364,201 as a couple. This means you’re earning a lot more than the average American, who makes a bit over $57,000 annually.

Keep in mind, the benchmark for being considered a high earner isn’t fixed; it tends to adjust each year with inflation. If you’re raking in a six-figure salary or more from various sources like your job, business, investments, or even retirement funds, then you’re definitely in this category.

How To Reduce Taxable Income For High Earners

If you are a high income earner, you will generally pay a higher % of your income to the IRS. The highest federal income tax bracket is 37% for those that earn over $578,126. Fortunately, there are some strategies to lower one’s tax burden. I will go over a few of the most common tactics for tax avoidance:

Convert to a Roth IRA

Converting to a Roth IRA presents a strategic opportunity for high earners aiming to minimize their future taxable income. Despite the IRS setting income caps on direct Roth IRA contributions, savvy investors have a workaround through what’s known as a backdoor Roth IRA or its larger counterpart, the mega backdoor Roth IRA.

This process begins with making non-deductible contributions to a traditional IRA—which don’t lower your taxable income right away—but then converting that traditional IRA into a Roth IRA. The conversion turns your savings into tax-free money when you retire.

The allure of a Roth IRA for high-income individuals lies in its potential for tax diversification, offering a blend of taxable and tax-free income sources for your retirement years. This IRA type empowers you with more control over your retirement withdrawals, providing the ability to strategically reduce tax impacts.

Though you’ll face taxes during the conversion, the timing is in your hands, making it a calculated move to manage taxation on your contributions. Once converted, both earnings and withdrawals from the Roth IRA remain untaxed.

Contribute to a Health Savings Account (HSA)

Contributing to a Health Savings Account (HSA) is a strategic move for managing both your health expenses and tax liabilities. An HSA serves as a personal account designed for the accumulation of funds to be used exclusively on qualifying medical expenses, offering a dual benefit of health preparedness and tax savings.

For 2023, the contribution limits are set at $3,850 for individuals and $7,750 for families, with an additional $1,000 allowed for those 55 years and older. Making contributions to an HSA, especially through payroll deductions, can lower your taxable income, leading to savings on taxes. Not only are contributions to an HSA not taxed, but the earnings and withdrawals for qualified medical expenditures are also tax-exempt.

HSAs cover a wide range of medical costs, including but not limited to X-rays, prescriptions, dental care, eyeglasses, and first aid supplies, providing flexibility and relief from future medical expenses. It’s a prudent way to ensure that you have the financial resources for healthcare needs without the burden of taxes or penalties, as long as the funds are used for eligible expenses.

Use Tax Savings Apps

In today’s fast-paced world, high-income earners have a powerful ally in managing taxes efficiently: financial apps. Among these, Playbook stands out as a game-changer. It’s designed specifically for those looking to smartly reduce their tax bill while aligning with their financial goals, such as retirement or major purchases.

Playbook simplifies tax savings with features like tax loss harvesting and intelligent investment allocation, making it easier for users to keep more of their hard-earned money. Its user-friendly interface and ability to link multiple accounts provide a comprehensive overview of your finances, ensuring you’re making the most out of every dollar when it comes to tax time.

For high earners seeking to navigate the complexities of tax planning with ease, Playbook is the go-to tool. It combines technology with financial savvy, offering a straightforward way to enhance your wealth with minimal tax impact.

If you are interested in learning more about how to reduce taxable income for high earners, Click Here to explore how Playbook can transform your approach to saving money on income taxes.

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Jeremy Biberdorf
Jeremy Biberdorf

About the Author:

Jeremy Biberdorf is the founder of Modest Money. He's a father of 2 beautiful girls, a dog owner, a long-time online entrepreneur and an investing enthusiast.

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