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Earn a six-figure income? Read on for ways to lower your tax burden. [[{“value”:”
No matter how much money you earn, you have to think about taxes. But if you earn $100,000 or more, your tax burden may be higher than someone who earns a lot less than you do.
That doesn’t mean you’re doomed to a massive IRS bill year after year, though. Here are a few steps you can take to eke out some tax savings.
1. Max out your IRA or 401(k)
The more money you put into a traditional IRA or 401(k) plan, up to the annual limit set by the IRS, the more income of yours you can shield from taxes. But to be clear, you only get a tax break on those contributions if you fund a traditional IRA or 401(k) — not a Roth account.
This year, IRAs max out at $7,000 for savers under the age of 50, and $8,000 for those 50 and over. With a 401(k) plan, the limits are much higher — $23,000 for savers under 50, and $30,500 for those 50 and over.
If you earn well over $100,000, it’s conceivable that you may be in a position to max out a 401(k). And you should know that if you’re entitled to an employer match in your account, it won’t count toward your contribution limit.
2. Take losses strategically in your brokerage account
If you’re investing in a brokerage account, your goal is no doubt to make money. But if you have an underperforming stock, selling it at a loss could benefit you from a tax perspective.
Capital losses in a brokerage account can be used to offset capital gains, which happen when you sell assets at a profit. And if you don’t have gains to offset, you can use up to $3,000 in investment losses to offset some ordinary income. So if you earn $120,000 a year, taking a $3,000 loss might reduce your taxable income to $117,000, leaving you to pay the IRS a bit less.
3. Donate to charity
You can claim charitable donations on your tax return if you’re someone who itemizes. Being a higher earner doesn’t automatically mean that itemizing will make sense for you. But if you own a home, your write-off for mortgage interest and state and local taxes (which include property taxes) might exceed your write-off under the standard deduction. So in that case, it pays to track your charitable donations and claim them on your tax return as well.
You should also know that you can claim a deduction for donated goods as well as money, as long as those goods are given to a registered charity. Let’s say you have an old dining room set you’re upgrading. You could try to sell it locally for $300. But if you don’t want to go through the hassle of doing that, you may instead want to find a charity that will take those items and claim a $300 deduction for that set’s fair market value — the amount it’s worth at the time of your donation, as opposed to its original value.
4. Go after the tax credits you’re entitled to
You might assume that if you earn more than $100,000, you won’t be eligible for any of the tax credits the IRS makes available to filers. But that’s not entirely true.
As one example, the Child Tax Credit is a credit you can claim in full if you earn under $200,000 as a single tax-filer or under $400,000 as a married couple filing jointly. And even if your income exceeds these limits, you don’t necessarily lose the credit completely — you may just get less of it.
Some credits, like the Earned Income Tax Credit, will be off the table if you earn $100,000 or more. But don’t assume there are no credits available to you.
Just because you earn a good wage doesn’t mean the IRS will get to take a massive chunk of your money. If you’re strategic in your tax planning, you may find that you’re able to reduce your IRS burden substantially and keep more of your hard-earned money for yourself.
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