Smart Tax Strategies for High-Income Earners

You knew your tax bill would go up when you hit the next income tier, but seeing the actual number stings more than you thought it would. It’s frustrating to feel like you’re somehow losing ground, even though you’re earning more than ever. 

We know you don’t have time for gimmicks, and you’re not looking to spend your evenings sorting through dubious tax shelters in order to squeeze every last deduction out of the system. 

The good news is, there are a number of better tax strategies for high income earners, and they involve rethinking how your income flows, where your investments live, and how you give. 

In this article, we’ll walk you through a few strategies that can help you keep more of what you’ve earned and make this next chapter feel like the step forward it should be.

Why Tax Efficiency Matters More as Income Grows

As your income increases, so does the impact of every financial decision. What you keep becomes nearly as important as what you earn. 

Higher income levels mean that even small shifts in how your income is structured or where your assets are held can swing your tax bill by tens of thousands of dollars. The last thing you want as a high income earner is for tax inefficiency to quietly drain the benefits of the hard-earned success you’ve spent years building.

Over time, the choices you make will determine whether your wealth compounds, or quietly gets chipped away year after year. When your taxes are structured efficiently, you gain more control over what you can reinvest, give, or set aside for the future. 

Tax Strategies for High Income Earners

Understanding how to reduce taxes for high income earners can help you make more intentional choices about how you structure your taxes. Here are a few key strategies to be aware of. 

Pay Attention to Income Types

Let’s start with income types, because not all dollars are created equal.

Take bonds, for example. When you’re out at the bond store shopping around for some steady income, it’s important to keep in mind what type of bonds you’re looking at and not just fixate on the interest rate. 

• Earning $100,000 in corporate bond interest could cost up to $37,000 in taxes, leaving about $57,000.
  
• Earning the same amount from a municipal bond can be tax-free, depending on which state the bond was issued in. In this case, you’ll keep the full $100,000 in your pocket.

 Once the tax impact enters your calculation, the decision becomes much more nuanced and specific to your situation. For high-income earners, it’s often smarter to lean into municipal bonds over corporate bonds if you’re looking to put more money in your pocket.

Use Deferred Compensation Wisely

If your employer offers a deferred comp plan, consider it a gift. You can delay income now (and the taxes that come with it), and take it later when your rate may be lower.

Let’s say you defer $100,000 this year. If you’re currently in a 37 percent bracket, you avoid $37,000 in taxes today. If you take that money during retirement, when you’re in the 24 percent bracket, you’re only paying $24,000 in total. That’s a $13,000 win.

But don’t let this backfire. Some people let deferred income build for years, but fail to properly integrate this into their financial plan. They withdraw all of those accumulated earnings in the year they retire which creates a massive, unexpected tax bill that could have been avoided. Sometimes we have seen people select this payout option because they figured they’ll need the money. Other times, it’s a failure to change the default option which is to payout all in the year of retirement.

A better move is to choose the longest payout period available, which is often ten years. Spread the income over time and keep your tax bracket in check. This strategy works best as part of your full financial picture, not as a standalone decision.

Set Up Tax-Efficient Donation Methods

If you’re using the standard deduction, your charitable giving may not actually be lowering your tax bill. This might be the case if you donate around $5,000 or less and don’t have a mortgage, big medical expenses, or any other deductions.

That’s where a Donor-Advised Fund, or DAF, can make a real difference. It’s a smarter, more strategic way to combine generosity with tax efficiency.

A DAF allows you to front-load several years’ worth of donations into a single tax year. You get to claim the full amount as an itemized deduction in that year, which can push you well past the standard deduction threshold. Then, you continue making donations to your favorite causes over time, directly from the fund.

The impact for the nonprofits stays the same, but the tax benefit becomes immediate and substantial.

You can also invest the balance in the DAF to grow your giving over time. It’s flexible, too. You can change the recipients, involve your kids in the decision-making, or align the giving with a major liquidity event.

Don’t Overcomplicate It

Too often, we’ve seen people chasing tax breaks with strategies that don’t fit their life. Buying rental properties they don’t want to manage. Hanging onto a mortgage they no longer need, just for the deduction.

It’s important to remember that your resources aren’t limited to dollars. Your time, focus, and energy matter just as much. Even if a strategy technically works on paper, it may still cost more than it’s worth if it’s eating up your non-financial resources.

Tax efficiency should support your life, not complicate it for the sake of squeezing out every last deduction. Focus on the things that align with your values and your goals..

Financial planning isn’t about perfection. It’s about sustainability. Simplicity is a great strategy, especially if it helps you stick with your plan for the long haul.

Real-World Lesson: When Smart Gets Complicated

We were working with a client who had enjoyed managing his own investments. He learned that there are investments called Master Limited Partnerships that can offer tax-advantaged income, so he invested in a handful of them. 

These are generally related to oil and gas pipelines and some of the income that investors receive can be classified as a return on principal. This means taxes get deferred until the investment is sold.

The Mistake

The problem was, the client had purchased these MLP investments in his individual retirement account, which is already a tax-deferred account. That meant there were no additional tax benefits from using this type of investment.

In fact, if you generate enough income from MLP investments within a retirement account, you will actually start getting taxed on this. This is classified as unrelated business taxable income, and it negates the tax-deferred benefit of the IRA.

The Takeaway

Smart strategies only work when they’re used in the right context. In this case, a tax-advantaged investment placed in a tax-deferred account canceled out the benefit and created an unexpected tax bill.

• Match each investment to the right type of account. Some investments belong in taxable accounts, others in retirement plans.
  
• Understand the fine print. Even intelligent, well-researched moves can create trouble if they’re used in the wrong place.
  
• Partner with someone who can see the whole picture. A trusted advisor will help you spot issues before they become expensive surprises.

Final Thoughts

When your income increases, the decisions you make around taxes carry more weight. You need more than a basic, year-to-year approach.  

Now is the time to be more deliberate with how your income is structured, how your investments are positioned, and how your giving is planned.  

Efficient tax strategy isn’t just a matter of cutting your tax bill. It’s about making sure your financial strategy reflects where you are and supports where you want to go.

Start by asking:

• What types of income am I earning, and how are they taxed?
• Are my investment, income, and charitable strategies working together?
• Do I have the right balance of simplicity and strategy?

At SK Wealth, our advisors have spent 25 years helping clients implement strategies that align with their values, simplify their lives, and optimize their financial future. Through our Integrated Financial Advantage™ process, we help you live with intention, tomorrow and today.

Click here to find out more about SK Wealth’s specialized financial planning and investment management services.