Saving Big: Best Tax Deductions for High Earners

Under the U.S. tax system, how much you pay in tax depends on where you land in its series of progressive tax rates. The IRS has seven tax brackets ranging from 10% to 37%. The more you earn, the higher the tax rate you will pay. You can expect to pay a hefty tax bill if you make a lot of money. But if you can take advantage of tax deductions, you pay less tax. Read on to learn about the best tax deductions for high earners.

Who Is Considered as High Earners?

You might think a high earner is someone who earns a seven-figure salary. Think again. A taxpayer is a high earner when they land in the top three IRS tax brackets. If you earn more than $171,051 and your filing status is single, head of household, or married filing separately, you are considered a high earner. Married taxpayers filing joint returns fall into the high-earner category if they make more than $340,101 combined. 

Best Tax Deductions for High Earners

Tax deductions lower your income and what you owe in tax. Some of the best tax deductions for high earners include:

Mortgage Interest

If you own your home, you can deduct the interest paid on your mortgage if you itemize. Generally, the interest you pay on the first $750,000 of mortgage debt on a primary or second home is deductible when you file a joint return.

Taxes

You may be able to claim a deduction for state and local taxes of up to $10,000 ($5,000 if married filing separately) if you itemize. If you qualify, you could deduct amounts paid for state and local income taxes, including property tax on your home, or you can elect to deduct state and local sales tax. 

Charitable Contributions

Donating to charity can reduce your tax liability if you itemize your deductions. You can deduct a part or all your charitable contributions to a qualified tax-exempt organization. Generally, you can take a deduction for the money you donate to charity of up to 60% of your adjusted gross income (AGI). If you donate property, automobiles, or household goods, you can deduct the fair market value of what you’ve contributed, subject to any AGI limitations. 

Retirement Contributions

You can lower your taxable income by making pre-tax retirement contributions. If you have a traditional 401(k) or 403(b) plan at work, your contributions lower your income, so you pay less federal tax. In 2023, you can contribute up to $22,500 plus an additional $7,500 if you are over 50. In 2024, the limit goes up to $23,000.

Medical Expenses

If you itemize, you can deduct the unreimbursed medical costs exceeding 7.5% of your adjusted gross income or AGI. You can include medical and dental expenses paid for yourself, spouse and dependents claimed on your return.

You can deduct what you paid toward such medical expenses as diagnostic tests, emergency room visits, prescriptions, and medical aids like eyeglasses and hearing aids. You can also include health insurance premiums paid with pre-tax dollars. 

Home Energy Credits

You could be eligible for a tax credit of up to $3,200 if you made qualified energy-efficient improvements to your home. If you installed new energy-efficient doors or windows or a new electric gas heat pump, you could get a credit on your tax return. 

HSA Contributions

With a health savings account (HSA), the money you put aside for future medical expenses is tax-deductible. To qualify, you must be covered by a high-deductible health plan (HDHP), not enrolled in Medicare, or claimed as a dependent on someone else’s return.

You can contribute up to $3,650 with self-only HDHP coverage and $7,300 with family HDHP coverage. Even if you don’t itemize, you can deduct the contributions you make with pre-tax dollars.

Business Expenses

If you are self-employed, you can write off your business expenses. Possible tax deductions include business travel, mileage, business insurance premiums, office supplies, and home office expenses. You pay less tax by reducing self-employment income with tax-deductible business expenses. 

Health Insurance

You may be able to deduct a portion of your health insurance premiums if you are self-employed. If you are covered by a high-deductible health plan (HDHP) and don’t have access to coverage through an employer or spouse, you could deduct a portion of the medical and dental insurance premiums if your business shows a net profit. 

Self-Employed Tax Deduction

If you freelance or have a side gig, you must pay a 15.3% self-employment tax based on your net income. You can take a 50% deduction of these self-employment taxes on your personal return. 

Expenses that High Earners Cannot Claim as Tax Deductions

Not every expense you pay is deductible on your personal tax return. These include

  • Club dues and membership fees: Amounts paid for clubs organized for social, recreation, or pleasure are non-deductible. Such fees include country club dues, athletic clubs, and sports clubs.
  • Certain state and local taxes: If you itemize and deduct state and local taxes, you cannot include gasoline tax, car inspection fees, or taxes you paid for someone else.
  • Homeowners insurance: The premiums you pay for homeowners’ insurance are non-deductible.
  • Health insurance premiums: Even if you claim a deduction for medical expenses, you cannot deduct health insurance premiums paid with after-tax dollars if you’re not self-employed.
  • Reimbursed medical costs: If you claim a deduction for medical expenses, you cannot include reimbursed costs. 

How to Prepare for Tax Filing and Monitor Tax Deductions for High Earners?

As a high earner, planning and preparation are critical when filing your tax return. Key steps you can take to monitor your deductions and file your return include:

  • Watch your tax bracket: Extra income can push you into a higher tax bracket. Consider tax-saving measures, like contributing to your retirement or HSA account to reduce your earnings.
  • Keep track of your deductions: When you have enough deductions to itemize, it may make sense to increase spending you can deduct. If you have exceeded the threshold for deducting medical expenses, it might be time to get that dental work you have been putting off.
  • Maintain supporting documentation: The IRS can disallow the expenses deducted if you cannot prove them. Maintain copies of invoices and receipts to support the tax deductions on your returns. If you donated money to a charity, be sure you receive a written acknowledgment of your contribution. 

How to Claim Tax Write-Offs as a High Earner on Your Tax Return?

As a high earner, you claim tax write-offs on several places on your personal return.

  • Schedule A: Itemize deductions, such as mortgage interest and charitable contributions.
  • Schedule C: Report self-employment income and expenses from your business activities.
  • Page 1: Deductions for HSA contributions, self-employment health insurance, and self-employment tax.
  • Form 5695: Reflect credits for energy-efficient home improvements. 

High Earners can Lower their Tax Bill with Deductions

Don’t pay more in taxes than you need to. As a high earner, there are plenty of tax deductions that can lessen the bite of your tax bill. The key is staying on top of what you make and how much you can deduct. doola Books offers stress-free bookkeeping software to help you easily manage your finances. Connect multiple bank accounts, tag and categorize income, and access bookkeeping support that can empower you to figure out the right deductions.

FAQs

Are there limits to how much I can deduct for certain expenses as a high earner?

The IRS places limits on the deductibility of certain expenses. The medical expense deduction is limited to costs exceeding 7.5% of adjusted gross income. You can deduct up to $2,500 in student loan interest. However, the student loan interest deduction begins to phase out once your modified adjusted income reaches $70,000 if you are single and $145,000 if you file a joint return.

What records should I keep to support my tax deductions as a high-earner?

You should keep copies of receipts, canceled checks, and credit card slips to support tax deductions. If you donated money, stock, or property, keep copies of donor acknowledgment letters and documents supporting the value of non-monetary donations.

How do tax deductions affect my overall taxes owed as a high-earner?

As a higher earner, you can reduce your taxable income by writing off tax-deductible expenses. As a result, you pay tax on lower income. 

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