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Savvy Tax Strategies for High Income Earners

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Ben Franklin famously wrote that though the U.S. Constitution appears to be permanent, in this world, nothing is certain except death and taxes. His pithy remark resonated throughout the ages. And although nothing can be done to avoid either, there are still reasonable steps to navigating one’s health… both physical and financial.

Despite the ever-changing socioeconomics, there are several strategic ways to protect one’s income and investments that will hold true throughout nearly all administrations. 


Reducing tax liability


Cutting an individual’s gross income is a key method of lowering how much is owed to the tax authorities—state, local, or federal. By reducing taxable income, one’s tax rate goes down.

Maxing out contributions to a pre-tax retirement account can help support future-forward goals. According to the IRS, the limit in 2022 on elective deferrals for an employer-sponsored retirement plan is $20,500 for those under age 50, and $27,000 for everyone else.[i] That’s the amount of an employee’s paycheck that can be contributed to a workplace retirement account such as a 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan.

If this is unavailable at your workplace, you can consider contributing to a traditional IRA (in which pre-tax money grows tax-deferred until it is withdrawn) or a Roth IRA (in which after-tax money grows tax-free and is withdrawn without an additional tax).

If you are saving to pay your child’s future tuition costs, you could consider a 529 plan, also known as a “qualified tuition plan.” Created to encourage saving for education costs, a 529 plan allows parents to set aside money for the beneficiary. This money is not taxed as it grows[ii] over the years or when it is accessed[iii] to ultimately pay tuition, room and board, etc.

Similarly, opening a Health Savings Account (HSA) allows someone to set aside untaxed money for qualified medical expenses, such as deductibles, co-payments, and coinsurance.[iv] This type of account is suitable for someone with a High Deductible Health Plan (HDHP), but could ultimately lower overall healthcare costs when approached correctly.

If you’re self-employed or own a business, you may be eligible for a host of work-related tax deductions related to website fees, membership dues, office supplies, and so on.[v]

An accountant can help identify lesser-known and surprising deductions. One example is the Augusta rule, which allows someone to rent out his or her home—as long as it’s not a primary place of business—for two weeks a year without reporting that income to the IRS. In the 1970s, residents of Augusta, Georgia lobbied Congress to have this exemption so they could rent out their homes during the world-famous Masters golf tournament.[vi]


Tax-efficient investing


Structuring your investment portfolio with taxes in mind from the beginning can alleviate the headache of seeing a large chunk of your returns disappear.

Tax-efficient investments made in a taxable account, such as a brokerage account, allow the owner to retrieve money without penalties.[vii] On the other hand, taxable income put into tax-deferred/exempt accounts aren’t as flexible, but allow you to save and earn.

Municipal bonds, also known as munis, are a great example of a tax-efficient investment. Issued by state and local governments, these debt securities lower your tax liability and help to finance public works projects, such as the construction of schools, bridges, roads, sewer systems, and hospitals.

In return for helping to finance the government’s capital expenditures, muni bond owners receive tax-free interest payments from the government. This investment could be triple-tax exempt (e.g., local, state, and federal). This is a particularly appealing option for higher earners who would like to put their money toward the greater good while reducing their tax liability and earning a bit more money in the meantime.

Due to inflation and the federal reserve increasing interest rates, yields on municipal bonds have been going up. That has recently made them a more attractive investment opportunity.

Even with shifting factors in the economic environment, focus on your long-term goals and work with your financial consultant to make pragmatic, sustainable shifts that are proactive, not reactive. 

Long-term capital gains, the profits from selling an asset after at least one year at a higher price, are taxed at a lower rate than ordinary income. But if you do not hold onto your investment for one year, it would constitute short-term capital gains and be taxed at the same level. 

There are other ways to protect these profits. If you know you’re sitting on an unpromising investment, for example, it could be beneficial to sell for a capital loss to offset any capital gains (if another investment turned a substantial profit).

If you are in a higher tax bracket, it might make sense to put the income from your bonus into a deferred compensation account. Years later, after you have retired and are in a lower tax bracket, you can access that money without the higher tax burden. It’s worth noting that this opportunity isn’t available at all workplaces and that deferring your income comes with a risk. It essentially makes you an unsecured creditor to the company—so if the business goes under, you may be out of luck.


Navigating the evolving tax code


As the winds of change blow through Washington, it’s essential to understand the specific actions one can take to thrive regardless of the administration in office.

It can be challenging to understand—let alone reduce—the extent of one’s tax impact. The tax code is already intricate and convoluted, but it’s also continuously in flux. On top of tracking expenditures and relevant tax deductions, shrewd Americans need to keep tabs on how politicians are tweaking the tax laws. Without a registered investment advisor, it’s difficult for high-income earners to keep up with the latest, most effective tax strategies.

Although general advice can be helpful, nothing can replace the trusted counsel of a tax professional who understands your unique financial situation and needs. Santander Financial Consultants can help people who worked hard for what they have make prudent financial decisions so they can spend that money on what truly matters to them.

Santander does not make any claims, promises, or guarantees about the accuracy, completeness, currency, or adequacy of any content. Santander expressly disclaims all express and implied warranties of accuracy, completeness, currency or adequacy of the information and content in this article. Readers should consult their own attorneys or tax or other advisors regarding the applicability of any referenced information or financial or other strategies to their own unique circumstances. This article does not necessarily reflect the views or endorsement of Santander. Please note that third party websites may have privacy and security policies different from Santander, please review the privacy and security policies of such websites.

Securities and advisory services are offered through Santander Investment Services, a division of Santander Securities LLC. Santander Securities LLC is a registered broker-dealer, member FINRA and SIPC and a Registered Investment Adviser. Insurance is offered through Santander Securities LLC or its affiliates. Santander Investment Services is an affiliate of Santander Bank, N.A.  Please speak to your tax professional concerning your specific situation.  Santander Securities LLC does not offer tax advice.


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i "Retirement Topics – Contributions.” IRS.

ii “An Introduction to 529 Plans.” U.S. Securities and Exchange Commission.

iii “The Top 7 Benefits of 529 Plans.” Saving for College.

iv “Health Savings Account.” HSA.

v “18 Legal Secrets to Reducing Your Taxes.” U.S. News & World Report.

vi“A Tradition Unlike Any Other: The Masters Tax Exemption.” Tax Foundation.

vii “Tax-Efficient Investing.” Investopedia.

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