A good income sounds like a great deal that opens up a lot of doors, and in many ways, that’s perfectly true.
Financial experts say that having a high income can be a pain when it comes time to do payroll taxes. In fact, Rachael Camp, founder and owner of Camp Wealth, recently said on the social media site X that a high income on a W-2 form can be “the worst tax deal in America.” She says that a high W-2 salary is at least $250,000.
Camp told MarketWatch in an interview, “A lot of the incentives you can find in the tax code fall with business owners and sometimes real estate investors as well.” He was referring to the many tax credits and deductions that can lower tax bills. On the other hand, many of her clients are doctors and experts, whose pay is reported to the IRS on W-2 forms as salary. It leads to “high effective tax rates, and there aren’t many ways to bring that down.”
Camp said that people who make more than $250,000 a year usually don’t qualify for many tax credits and can’t choose when they get paid. They get paid the same way everyone else does: as common income. This means that it is taxed more heavily than investment income.
If you compare pay income to other types of income, Jon Swanburg of TSA Wealth Management in Houston said, “You can’t really change it.” “Being a W-2 worker, it is what it is, which is fine.” “It is what it is.”
But Camp and Swanburg pointed out that people who make a lot of money can still save on taxes. Camp, Swanburg, and other advisors often figure that out for their clients at the end of the year.
In 2025, politicians will decide what to do with the federal income tax code after President-elect Trump’s tax cuts from 2017 end. This will be a big year for tax news. Here are some of the best tax tips for people who make a lot of money that will help them save money after 2024.
Start with retirement plans, but hurry, because “time is of the essence.”
Camp said that some ways to save on taxes need a lot more thought. “We need to check the value of the trouble and decide if it’s worth it.” A big part of Camp’s informal measure is putting more money into or even maxing out an employer-sponsored retirement account like a 401(k) or 403(b) plan.
When wage makers put money into these plans, their tax bill goes down for the year, no matter how much they make. That’s because the money that would have been taxed is going to an account where it won’t be taxed until later. Once the account user takes the money out, it will be taxed.
The IRS says that this year people can put up to $23,000 into their 401(K). People aged 50 and up can add an extra $7,500.
According to Richard Pon, a financial planner in San Francisco, don’t put extra cash in a 401(k) without first thinking about what else you could do with the money. You might want to consider whether the money would be better spent on something more important, like a house or your child’s college education. He told her, “It might happen in two years.”
People who want to take this step should know that they don’t have much time because of managing wages. Stephen Dombroski, senior manager of payroll tax and financial compliance at Paychex PAYX +1.47%, says that they should call their employers right away to see if they can raise the amount of pre-tax deferrals in their last pay cheque.
And for many employers, the last pay cheque for the pay period finishing this Friday, Dec. 20, may come on Friday, Dec. 27. He said, “Time is of the essence.” Dombroski said to make sure it’s handled as a one-time event so that bigger deferrals don’t come as a “unwelcome surprise” in early 2025 pay cheques.
Some people who are saving for retirement can get tax breaks on the money they put into an IRA in 2024 until next year’s tax day. These tax breaks only work for people with certain amounts of income and depend on whether they have access to a retirement plan at work.
The IRS says that people whose modified adjusted gross income is more than $87,000 will no longer be able to take the credit this year. For married people, the most they can earn is $123,000.
Giving to charity
The IRS lets people get a tax break for giving to charity, but they can only use it if they list all of their expenses. The IRS says that 90% of taxpayers use the standard deduction to lower their taxable income. However, study shows that the 10% of taxpayers who itemise are usually families with higher incomes.
The IRS lets people deduct up to 60% of their adjusted gross income in cash gifts. The IRS says that people can subtract up to 30% of their adjusted gross income when they give away things that will go up in value, like stocks.
Swanburg said that giving stock to charity doesn’t subject the giver to a capital gains tax and the giver can still claim the charitable giving credit. He said that donors should make sure they had the stock for at least a year in order to get the most tax breaks.
Donors may want to use the tax break right away, but they haven’t chosen where to give yet. Swanburg and Camp said that setting up a donor-advised fund is a quick and easy thing to do. Swanburg said that these accounts are easy for big broking firms to set up and that people can put things like cash and stocks in them.
“Bundling” means making gifts that were supposed to be made over a number of years all in one year. This is one way to get the most out of a tax break for giving to charity. It’s possible that the itemised deduction is a better way to lower taxable income if you make more gifts and deduct things like medical bills and mortgage interest.
Getting tax losses
When people sell stocks at a loss to lower their taxes, this is called tax-loss harvesting. This is related to strategic grouping. If you have long-term capital gains, you can balance them with capital losses. Depending on your income, the tax rate on these gains is 0%, 15%, or 20%. If you have more losses than gains, you can use up to $3,000 to reduce your regular income. The rest of the money is carried over to future years.
In a good way, it’s hard to find specific investments that have lost money when stocks have generally done well this year. The Dow Jones Industrial Average DJIA +0.91% is up more than 15% and the S&P 500 SPX +1.10% is up 27% so far this year.
At least for Swanburg’s clients, “tax-loss harvesting is kind of on the back burner right now, but it will be there.”
Swanburg said that owners may be able to save on taxes in 2024 even if their investments aren’t losing money right now. This is because of losses that happened in previous years. They might need to get those old tax records out of the closet first.
If you still have losses after deducting up to $3,000 in capital losses, the extra is carried forward forever until it is used up.
Swanburg said that many people might not be keeping track of their added loses after they’ve taken the first loss. “A lot of people don’t think about it.” It is given to their tax lawyers, and they take it from there.
Accounts for health savings
Health savings accounts can help people save money on taxes and plan for future medical bills if their employers offer certain types of health insurance.
Pay cheque contributions to these accounts are not counted as income, and anyone can deduct any extra money they put in on top of salary deferrals. The money grows tax-free, and if it’s used for approved medical costs, it’s not taxed as income.
It sounds good, but there are a few problems. The plan that goes with it must have a high cost. The IRS says that a high-deductible plan for an individual needs to have a deductible of at least $1,600 and for a family, it needs to have a deductible of at least $3,200.
It was found that 57% of workers who were covered by their employers had health plans with fees of at least $1,000 for single coverage. This information came from KFF and the Peterson Centre on Healthcare.
Regular plans have higher monthly rates than high-deductible plans, but policyholders have to pay more before insurers pay out.
Camp puts money into her HSA first because it’s the best value and gives her tax breaks. When her clients are thinking about putting money into an HSA, she tells them that taxes aren’t the only thing that matters.
“Do not let the tax tail wag the dog.” “Go with that if you need better health insurance,” Camp said.
