Want to lower your taxes legally while growing your wealth? High-income earners have access to numerous tax-saving strategies that can significantly reduce their liabilities. From maximizing retirement contributions to leveraging real estate depreciation, these methods are fully compliant with IRS rules and designed to help you keep more of your earnings.
Here are 10 effective strategies to consider:
- Maximize Retirement Contributions: Use 401(k)s, IRAs, and catch-up contributions to lower taxable income.
- Health Savings Accounts (HSAs): Triple tax benefits - tax-free contributions, growth, and withdrawals for medical expenses.
- 1031 Exchanges: Defer capital gains taxes when reinvesting in like-kind real estate properties.
- Qualified Small Business Stock (QSBS): Exclude up to $15 million in gains from federal taxes.
- Donor-Advised Funds (DAFs): Combine charitable giving with immediate tax deductions and long-term growth.
- Real Estate Depreciation: Offset rental income with non-cash depreciation deductions.
- Pass-Through Business Deductions: Claim up to 20% of business income as a deduction under Section 199A.
- Family Limited Partnerships (FLPs): Shift income and reduce estate taxes through discounted asset transfers.
- Stock Options & Equity Compensation: Defer taxes and benefit from lower capital gains rates.
- Relocate to Lower-Tax States: Move to states with no income tax or invest in Opportunity Zones.
Each strategy requires strict adherence to IRS regulations and careful planning with tax professionals. These approaches can minimize tax burdens, protect wealth, and create opportunities for long-term financial growth.
10 Legal Tax Strategies for High-Income Earners Comparison Chart
1. Maximize Retirement Account Contributions
Tax Savings Potential
Contributing to a traditional 401(k) or 403(b) directly lowers your Adjusted Gross Income (AGI). For 2026, the maximum contribution limit rises to $24,500, up from $23,500 in 2025. If you're in the 37% tax bracket, maxing out your contributions could save you approximately $9,065 in federal taxes.
For IRAs, the contribution limit increases to $7,500 in 2026 (up from $7,000 in 2025). While traditional IRA contributions may reduce your taxable income, Roth IRAs grow tax-free and allow tax-free withdrawals in retirement - a major advantage if you anticipate being in a higher tax bracket later in life.
If you're self-employed, options like SEP IRAs or Solo 401(k)s allow contributions up to $70,000 (based on 2025 limits). These plans provide a way for business owners to significantly lower their taxable income while saving for retirement.
Applicability to High-Income Earners
High-income earners have additional opportunities to maximize contributions. If you're 50 or older, you can make catch-up contributions of $8,000 to your 401(k) in 2026. For those aged 60 to 63, the SECURE 2.0 Act permits an enhanced catch-up of $11,250, bringing your total contribution limit to $35,750. For IRAs, catch-up contributions add $1,100, enabling those 50 and older to contribute up to $8,600 in 2026.
However, income limits can restrict your ability to deduct traditional IRA contributions or make direct Roth IRA contributions. For example, deduction limits for traditional IRAs phase out if your Modified Adjusted Gross Income (MAGI) exceeds $81,000 (single) or $129,000 (married filing jointly). Similarly, Roth IRA contributions are not allowed if your MAGI exceeds $161,000 (single) or $240,000 (joint). In these cases, a backdoor Roth IRA can be an effective workaround. As Ramsey Solutions explains:
"A backdoor Roth IRA is a perfectly legal strategy for high-income earners who can't contribute to a Roth IRA... It's 100% legit."
For those with after-tax 401(k) contributions available, the mega backdoor Roth strategy allows you to move up to $46,500 into a Roth account annually. However, only about 11% of 401(k) plans currently offer this option. Dan Galli of Daniel J. Galli & Associates highlights its benefit:
"By doing this right, you can essentially avoid taxation on all growth. And that's where the magic is."
Compliance with IRS Regulations
To maximize the benefits of retirement contributions, strict compliance with IRS rules is essential. Exceeding contribution limits results in a 6% annual penalty on the excess amount, so automating contributions through payroll deductions can help you stay within limits.
If you're pursuing a backdoor Roth conversion and hold multiple traditional IRAs, be mindful of the pro-rata rule. This IRS rule treats all your traditional IRA assets as a single pool when calculating taxes owed on conversions. Consulting a tax professional before executing this strategy is highly recommended.
It's also important to note that traditional retirement accounts require Required Minimum Distributions (RMDs) starting at age 73, while Roth IRAs do not require RMDs during your lifetime.
Long-Term Wealth Preservation Benefits
Maximizing retirement account contributions not only reduces your current tax burden but also takes advantage of compounding growth. Traditional accounts grow tax-deferred, allowing your balance to compound without annual tax deductions, while Roth accounts grow tax-free and offer tax-free withdrawals. Ben Fuchs, CFP® at Fuchs Financial, underscores this point:
"Tax-advantaged retirement accounts are one of the best ways high-income earners can reduce their taxes. These accounts help you build wealth for retirement and lower your current tax burden at the same time."
Here's a quick look at the key contribution limits for 2025 and 2026:
| Account Type | 2025 Limit | 2026 Limit | Catch-Up (Age 50+) |
|---|---|---|---|
| 401(k) / 403(b) | $23,500 | $24,500 | $8,000 |
| Traditional / Roth IRA | $7,000 | $7,500 | $1,100 |
| SEP IRA / Solo 401(k) | $70,000 | TBD | N/A |
| Special Catch-Up (60-63) | $11,250 | $11,250 | N/A |
2. Use Health Savings Accounts (HSAs)
Boost your retirement savings strategy by incorporating Health Savings Accounts (HSAs), which offer tax advantages that go beyond traditional savings options.
Tax Savings Potential
HSAs come with a rare triple tax advantage: contributions reduce your taxable income dollar-for-dollar, the funds grow tax-free when invested, and withdrawals for qualified medical expenses are tax-free as well. For 2026, contribution limits rise to $4,400 for individuals and $8,750 for families, up from $4,300 and $8,550 in 2025. If you’re 55 or older, you can add an extra $1,000 as a catch-up contribution. High-income earners, in particular, can benefit by fully funding their HSA to enjoy immediate federal tax savings.
What makes HSAs even more appealing is that contributions are above-the-line deductions. This means they lower your Adjusted Gross Income (AGI) regardless of whether you itemize or take the standard deduction. A lower AGI could help you qualify for other tax benefits or avoid income limits that reduce deductions.
Starting with these tax-saving perks, high-income earners can unlock even more value by managing their HSAs strategically.
Applicability to High-Income Earners
Unlike Roth IRAs, which have income limits, HSAs are available to everyone who meets the requirements. The only condition is enrollment in a High-Deductible Health Plan (HDHP). For 2025, this means a minimum deductible of $1,650 for individuals or $3,300 for families. High-income earners can maximize their HSA’s potential by paying current medical expenses out-of-pocket, allowing the account balance to grow through investments in stocks, bonds, or mutual funds. Save your receipts indefinitely to claim tax-free reimbursements later.
Additionally, if both spouses are 55 or older, not enrolled in Medicare, and maintain separate HSAs, you can contribute a combined total of $10,750 for family coverage in 2026.
Compliance with IRS Regulations
To contribute to an HSA, you must meet a few conditions: be covered by an HDHP on the first day of the month, avoid disqualifying coverage like a general-purpose FSA, not be enrolled in Medicare, and not be claimed as a dependent. You’ll need to file Form 8889 with your tax return to report contributions and distributions.
One key rule to remember is the last-month rule: if you’re HSA-eligible on December 1st, you’re considered eligible for the entire year. However, you must remain eligible during the following 12-month testing period to avoid taxes and a 10% penalty on excess contributions. Also, stop contributing at least six months before enrolling in Medicare to avoid penalties. Withdrawals for non-qualified expenses before age 65 incur a 20% penalty plus ordinary income tax.
Long-Term Wealth Preservation Benefits
Once you turn 65, HSAs become even more versatile. The 20% penalty for non-medical withdrawals disappears, so you can use the funds for any purpose while paying only ordinary income tax - essentially functioning like a traditional IRA. Withdrawals for medical expenses remain tax-free.
Unlike Flexible Spending Accounts (FSAs), HSAs don’t have a "use-it-or-lose-it" policy. Your balance rolls over indefinitely and stays with you, even if you change jobs. Combined with the potential for investment growth, this makes HSAs a powerful tool for building long-term wealth. Funds can be used for qualified expenses like dental care, vision, prescriptions, and long-term care insurance premiums.
| Tax Year | Individual Limit | Family Limit | Catch-up (Age 55+) |
|---|---|---|---|
| 2025 | $4,300 | $8,550 | $1,000 |
| 2026 | $4,400 | $8,750 | $1,000 |
3. Take Advantage of 1031 Like-Kind Exchanges
For real estate investors, preserving wealth often comes down to smart tax strategies. One such approach is the 1031 exchange, a tool that lets you defer capital gains taxes while reinvesting in new properties. This not only helps protect your equity but also keeps your money working for you.
Tax Savings Potential
A 1031 exchange allows you to sell one investment property and reinvest the proceeds into another "like-kind" property without paying capital gains taxes immediately. For high earners, this can be a game-changer. Long-term capital gains tax rates typically range from 15% to 20%. The higher rate applies to single filers earning more than $533,400 or married couples filing jointly with incomes above $600,050 in 2025. By deferring these taxes, you retain more equity for reinvestment and delay taxation on depreciation recapture.
"A 1031 exchange is a strategy that can allow real estate investors to defer capital gains taxes on sales of investment properties." – Fidelity Investments
However, to fully benefit from this strategy, you need to follow the IRS's rules to the letter.
Compliance with IRS Regulations
The IRS has strict guidelines for 1031 exchanges, and missing any of them could result in a hefty tax bill. Here’s what you need to know:
- Eligible Properties: Both the property you sell and the one you buy must be for investment or business use. Your primary home doesn’t qualify.
- Identification Period: After selling your property, you have 45 days to identify up to three potential replacement properties.
- Exchange Period: The entire transaction must be completed within 180 days of selling your original property.
- Qualified Intermediary (QI): A third-party intermediary is required to hold the proceeds in escrow. You can’t handle the funds directly.
- "Boot" Taxation: Any cash you receive or reduction in mortgage debt during the exchange, known as "boot", is taxable in the same year.
These rules are non-negotiable, and you’ll need to report the exchange on Form 8824 when filing your taxes.
| Requirement | Rule Detail |
|---|---|
| Property Type | Must be real property held for investment or business use; primary residences do not qualify. |
| Identification Period | 45 calendar days from the sale date to identify a replacement property. |
| Exchange Period | 180 calendar days from the sale date to finalize the acquisition of the new property. |
| Intermediary | A third-party Qualified Intermediary is required; you cannot act as your own agent or attorney. |
Long-Term Wealth Preservation Benefits
The beauty of 1031 exchanges lies in their long-term potential. By repeatedly using this strategy, you can grow your real estate portfolio without losing equity to taxes. Even better, if you hold onto the property until your death, your heirs could benefit from a stepped-up basis. This adjustment resets the property's value to its current market price, potentially erasing the deferred tax liability and leaving them with no capital gains taxes to pay.
This strategy, when paired with careful planning, can help you build and preserve wealth for generations.
4. Use Qualified Small Business Stock (QSBS) Exclusions
If you're a high-income earner with investments in startups or equity in small businesses, the QSBS exclusion could be a game-changer for your tax strategy. This provision allows you to exclude up to 100% of your capital gains from federal income tax when selling qualifying stock. For some, this could mean millions in tax-free gains. It's especially effective when combined with other tax-deferral strategies, focusing specifically on startup investments and small business equity.
Tax Savings Potential
For stock acquired after July 4, 2025, you can exclude up to $15 million in capital gains - or 10 times your stock's adjusted basis, whichever is greater. The exclusion works on a tiered schedule: 50% after three years, 75% after four years, and 100% after five years.
"With proper QSBS planning, that entire gain could be completely tax-free at the federal level." – Blake Cantrell, Attorney and Founder, Cantrell Law Firm
This exclusion doesn't just stop at capital gains. It can also exempt you from the Alternative Minimum Tax (AMT) and the 3.8% Net Investment Income Tax (NIIT).
| Feature | Stock Issued Before July 4, 2025 | Stock Issued After July 4, 2025 |
|---|---|---|
| Maximum Exclusion | $10 million (or 10x basis) | $15 million (or 10x basis) |
| Gross Asset Limit | $50 million | $75 million |
| 3-Year Hold Benefit | 0% exclusion | 50% exclusion |
| 4-Year Hold Benefit | 0% exclusion | 75% exclusion |
| 5-Year Hold Benefit | 100% exclusion | 100% exclusion |
Compliance with IRS Regulations
The IRS has strict rules for QSBS eligibility. First, the issuing company must be a U.S.-based C corporation - S corporations, LLCs, and partnerships don't qualify. You also need to acquire the stock directly from the company, whether through money, property, or services. Stocks bought on the secondary market won't count.
For stock issued after July 4, 2025, the company’s gross assets must not exceed $75 million at the time of issuance or immediately after. This limit is based on the tax basis of assets, not their market value. Additionally, at least 80% of the company’s assets must be actively involved in running a qualified trade or business during most of your holding period.
Certain industries are excluded from QSBS eligibility. Businesses in professional services (law, health, accounting, consulting), financial services (banking, insurance, investing), farming, mining, and hospitality (hotels and restaurants) don’t qualify. However, industries like technology, manufacturing, retail, and wholesale generally do.
If you're a founder receiving restricted stock, filing an 83(b) election within 30 days of issuance can start the QSBS holding period immediately.
Applicability to High-Income Earners
High-income earners can amplify QSBS benefits through strategies like "stacking." Since the exclusion applies per taxpayer, gifting QSBS shares to family members or trusts before they appreciate allows each recipient to claim their own $15 million exclusion.
"Section 1202 offers investors an incredibly valuable opportunity – which may be further increased by carefully employing various strategies [such as] dividing one's QSBS ownership among multiple taxpayers." – Adam P. Margulies, Attorney, Farrell Fritz, P.C.
Business owners might also consider converting a partnership or LLC into a C corporation after the business has appreciated. This allows the "10 times basis" rule to apply to the fair market value at the time of conversion, potentially shielding larger gains.
If you need to sell QSBS before reaching the five-year holding period, Section 1045 lets you defer the gain by reinvesting the proceeds into new QSBS within 60 days, as long as you held the original stock for at least six months. However, not all states align with federal QSBS rules, so state capital gains taxes might still apply.
Long-Term Wealth Preservation Benefits
QSBS can play a key role in preserving wealth by eliminating federal capital gains taxes, leaving more resources for reinvestment or estate planning. Transferred QSBS retains your holding period and cost basis, making it a valuable tool for legacy planning.
"The most successful QSBS planning happens at business formation, not at exit." – Blake Cantrell, Attorney and Founder, Cantrell Law Firm
To maximize the benefits, consider obtaining a QSBS attestation letter from the company when the stock is issued. This letter confirms compliance with the $75 million asset test and other requirements. Keeping detailed records of the stock's issuance and the company's ongoing adherence to the 80% active business rule is also essential.
5. Set Up a Donor-Advised Fund for Charitable Contributions
When it comes to advanced retirement and investment strategies, charitable giving can play a key role in optimizing your tax planning. A donor-advised fund (DAF) allows you to make a charitable contribution now, secure an immediate tax deduction, and decide later which charities will receive grants from the fund - even years down the line. By contributing long-term appreciated assets to a DAF, you can avoid capital gains taxes and deduct the full fair market value, maximizing the impact of your donation.
Tax Savings Potential
DAFs offer significant tax advantages. For example:
- Cash contributions to a DAF are deductible up to 60% of your adjusted gross income (AGI).
- Contributions of long-term appreciated securities are generally limited to 30% of AGI.
If your contributions exceed these limits, you can carry the excess forward for up to five years.
High-income earners often use a "bunching" strategy, where they combine several years of planned donations into a single high-income year. This approach helps them exceed the standard deduction threshold - $15,000 for individuals or $30,000 for married couples filing jointly in 2025 - and can offset one-time income spikes from business sales, large bonuses, or Roth IRA conversions.
"Tax planning around charitable giving is complicated. Planning today with an advisor could help make a meaningful difference on your charitable impact and tax benefits." – Evan Potash, Executive Wealth Management Advisor, TIAA
Beyond income tax benefits, DAF contributions are excluded from your taxable estate, which can reduce estate tax liability for estates valued over $15 million in 2026. Plus, assets in a DAF grow tax-free, increasing the funds available for future grants.
| Contribution Type | DAF Deduction Limit | Private Foundation Limit |
|---|---|---|
| Cash | 60% of AGI | 30% of AGI |
| Appreciated Securities | 30% of AGI | 20% of AGI |
Compliance with IRS Regulations
To claim deductions for DAF contributions, you must itemize your deductions on Schedule A of Form 1040. However, fewer than 10% of taxpayers currently itemize due to higher standard deduction levels. Contributions must go to a qualified 501(c)(3) public charity, and once assets are deposited, they are irrevocable - you no longer have legal control over them.
For contributions of $250 or more, a contemporaneous written acknowledgment from the sponsoring organization is required. It's also important to note that under current IRS rules, qualified charitable distributions (QCDs) from an IRA cannot be used to fund a DAF.
Applicability to High-Income Earners
DAFs are particularly attractive for high-income earners interested in donating appreciated securities rather than cash. If you've held a stock for over a year and its value has significantly increased, transferring it directly to a DAF allows you to bypass the 15%–20% capital gains tax. Additionally, high earners can use bunching strategies to offset taxable income during years with significant earnings.
Long-Term Wealth Preservation Benefits
DAFs provide both immediate tax benefits and long-term flexibility. Unlike private foundations, which are required to distribute at least 5% of their assets annually, DAFs have no federal payout requirement. This means the assets can grow indefinitely, allowing you to make a greater impact over time. You can even pass your DAF to heirs, creating a family tradition of giving while keeping the assets out of your taxable estate.
"A donor-advised fund, or DAF, is a giving account established at a public charity, allowing donors to make charitable contributions, receive an immediate tax deduction, and recommend grants from their DAF account over time." – Andrew W. Hastings, Executive, Family Office & Private Client Development, NPTrust
Another advantage is the ability to remain anonymous. You can recommend grants to charities without revealing your identity, which helps maintain privacy and avoids future solicitations. A DAF is a powerful tool that complements other tax planning strategies, helping you preserve wealth while supporting causes that matter to you.
6. Claim Real Estate Depreciation Deductions
Real estate depreciation offers property investors a valuable tax advantage. Essentially, it’s an annual income tax deduction that lets you recover the cost of income-generating property over its useful life due to wear and tear, aging, or obsolescence. The beauty of this strategy? It’s a non-cash expense, meaning it reduces your taxable income even if your property is turning a profit.
"With rental properties, the owner can have cash flow coming in, but the depreciation can offset the revenue to lower their annual tax bill." – American Apartment Owners Association
Tax Savings Potential
The IRS allows depreciation over specific timeframes: 27.5 years for residential rentals and 39 years for commercial properties. For example, if you own a residential rental property valued at $275,000 (excluding land), you can deduct around $10,000 annually - roughly 3.636% of the building’s value. If you’re in a 37% tax bracket, that deduction could save you approximately $3,700 in taxes each year.
For those in higher income brackets, strategies like bonus depreciation under the OBBB and the Section 179 expense deduction (set at $1,250,000 for 2025) can further accelerate savings. Qualifying improvements - such as new roofs, HVAC systems, or security systems - can also be deducted under these provisions.
| Property Type | Recovery Period | Annual Depreciation Rate |
|---|---|---|
| Residential Rental Property | 27.5 Years | ~3.636% |
| Commercial Real Property | 39 Years | ~2.564% |
| Appliances/Carpeting | 5 Years | 20% |
Compliance with IRS Regulations
To claim depreciation, the property must meet a few conditions: it must be owned by you, used in a business or income-producing activity, have a determinable useful life, and last more than one year. Importantly, land itself isn’t depreciable - only the buildings and improvements qualify.
When calculating the depreciable basis, you’ll need to subtract the land’s value from the total purchase price and include closing costs like legal and recording fees. Depreciation is reported using IRS Form 4562 and summarized on Schedule E of Form 1040. For properties placed in service after 1986, the IRS requires the Modified Accelerated Cost Recovery System (MACRS). Depreciation begins once the property is "ready and available for use", which might be before your first tenant moves in.
High-income earners should also be aware of Passive Activity Loss (PAL) rules. Generally, rental losses are considered passive and can only offset passive income. However, exceptions exist for real estate professionals or those meeting active participation requirements. Also, if your modified adjusted gross income exceeds certain thresholds, rental income may be subject to the 3.8% Net Investment Income Tax (NIIT).
Applicability to High-Income Earners
Depreciation provides a unique advantage for high-income earners by creating "paper losses" that can offset taxable income. For instance, if your rental property generates $50,000 annually, depreciation could result in a net tax loss on paper, reducing your overall tax liability based on your marginal tax rate. Combining depreciation with other strategies - like a 1031 exchange - can help defer capital gains taxes when you eventually sell.
Additionally, high-income investors can benefit from deductions like the 70-cents-per-mile standard mileage rate for rental-related travel in 2025. Qualifying as a real estate professional can also allow you to offset rental losses against non-passive income, such as W-2 wages. This approach not only reduces your current taxable income but also complements long-term tax planning.
Long-Term Wealth Preservation Benefits
Depreciation isn’t just about saving on taxes - it’s also a tool for building wealth. By reducing your tax liability, you free up capital to reinvest in more properties or make improvements. This can improve your debt-to-income ratio, making refinancing and pulling equity easier for future investments.
Pairing depreciation with a Section 1031 exchange amplifies its benefits. While depreciation lowers taxes during ownership, a 1031 exchange allows you to defer both capital gains taxes and depreciation recapture when selling. This strategy helps preserve wealth across multiple property cycles. However, be aware that if you sell a property for more than its depreciated basis, the IRS may recapture the claimed depreciation at rates up to 25%. Combining depreciation with strategies like 1031 exchanges ensures a well-rounded approach to managing and growing your portfolio efficiently.
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7. Claim Pass-Through Business Income Deductions
After exploring real estate depreciation, high-income earners can also cut taxes by taking advantage of deductions available to pass-through business owners.
If you own a pass-through entity - like an LLC, S corporation, partnership, or sole proprietorship - you might qualify for a deduction of up to 20% of your net business income under Section 199A, also known as the Qualified Business Income (QBI) deduction. Thanks to the One Big Beautiful Bill Act, this deduction is now permanent, eliminating its original 2025 expiration date. For those who qualify, this deduction effectively reduces the top marginal tax rate on eligible income from 37% to 29.6%.
Pass-through entities are taxed at the individual level, avoiding the double taxation faced by C corporations. Interestingly, around 91% of pass-through income is reported by taxpayers in the top 20% of earners, with the top 1% accounting for 57% of the total.
How the Deduction Works
In 2025, taxpayers with incomes below $197,300 (single) or $394,600 (married filing jointly) can claim the full 20% deduction. Once these thresholds are exceeded, limitations kick in, depending on factors like your business type, W-2 wages paid, and the value of depreciable property held. This deduction is projected to reduce federal revenues by nearly $60 billion annually by 2024.
"Pass-through business owners who qualify can deduct up to 20% of their net business income from their income taxes, reducing their effective income tax rate by 20%." – Stephen Fishman, J.D., Nolo
For high-income earners in Specified Service Trades or Businesses (SSTBs) - such as law, healthcare, or consulting - the rules are stricter. If your taxable income exceeds $247,300 (single) or $494,600 (married filing jointly), the deduction phases out entirely for SSTBs. Non-SSTB owners, however, remain eligible for deductions but must navigate wage and property limitations. Notably, architecture and engineering professionals are excluded from the SSTB definition, granting them more flexibility.
| 2025 Taxable Income Level | SSTB Business Deduction | Non-SSTB Business Deduction |
|---|---|---|
| Below $197,300 (S) / $394,600 (M) | Full 20% of QBI | Full 20% of QBI |
| $197,301–$247,300 (S) / $394,601–$494,600 (M) | Phased out based on income | Subject to W-2/property limit phase-in |
| Above $247,300 (S) / $494,600 (M) | No Deduction Allowed | Limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the property's basis |
Navigating IRS Requirements
For non-SSTBs exceeding income thresholds, deductions are capped at the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis of depreciable property. High earners should focus on optimizing payroll and keeping detailed records of business assets to get the most out of this deduction.
Additionally, a minimum deduction of $400 is available for those with at least $1,000 in QBI. However, it's crucial to avoid transactions flagged by the IRS, such as straddle tax shelters or micro-captive insurance structures.
By adhering to these IRS regulations, high-income earners can leverage this deduction for notable tax savings.
Extra Benefits for High-Income Earners
Over 30 states have introduced Pass-Through Entity Tax (PTET) legislation, which allows businesses to pay state taxes at the entity level. This approach sidesteps the federal $40,000 SALT deduction limit (raised from $10,000 by the One Big Beautiful Bill Act for 2025), offering additional savings for those in high-tax states. The availability of the 20% deduction has encouraged more businesses to organize as pass-through entities, contributing to the rise of flow-through organizations from 47% of businesses in 1980 to over 80% by 2015.
Building Long-Term Wealth with Tax Savings
Reducing your tax bill by up to 7.4% frees up funds that can be reinvested into your business, real estate, or retirement accounts to boost long-term growth. For instance, if you have $500,000 in QBI and qualify for the full deduction, you could save approximately $37,000 in federal taxes annually - money that can fuel additional wealth-building strategies.
"The 199A deduction effectively reduces the top marginal tax rate on qualifying pass-through income from the top ordinary rate of 37 percent to 29.6 percent." – Tax Policy Center
You can also shift income to family members by hiring them, reducing your overall tax burden and enabling tax-free growth in Roth IRAs. Additionally, classifying part of your income as S-corp profit rather than W-2 wages could save around 4% in Medicare taxes, further preserving your capital. These strategies combine to help minimize taxes while setting the stage for long-term wealth growth.
8. Structure Income Through Family Limited Partnerships (FLPs)
For high-income earners, Family Limited Partnerships (FLPs) can be a smart way to shift income to family members in lower tax brackets. By transferring limited partnership interests to children or relatives, you effectively move the tax burden on dividends, interest, and capital gains to individuals who may qualify for 0% long-term capital gains rates or lower marginal tax rates. This approach builds on traditional tax planning strategies by using family-based structures to improve tax efficiency.
Tax Savings Potential
One of the key benefits of FLPs is the ability to apply valuation discounts when transferring non-controlling interests. Since limited partners lack management authority and these interests aren't publicly traded, the IRS often allows discounts ranging from 10% to 45%. This means you can transfer more wealth while using less of your lifetime gift tax exemption, which is set at $13.99 million per individual or $27.98 million per married couple for 2025. Additionally, the $19,000 annual gift exclusion per individual ($38,000 for married couples) allows for yearly, tax-free wealth transfers.
For example, if you gift $1 million worth of FLP shares with a 30% valuation discount, the IRS would value the gift at $700,000 for tax purposes. Any future appreciation on these assets would then grow outside your taxable estate, helping you avoid the 40% federal estate tax. This is particularly advantageous given that estate tax exemptions are expected to drop by roughly half after 2025.
Compliance with IRS Requirements
The IRS keeps a close eye on FLPs, especially those claiming valuation discounts above 45%. To avoid issues during an audit, your FLP must have a legitimate business purpose - such as managing a family real estate portfolio or pooling investment capital - beyond just tax savings. A formal partnership agreement should clearly define the roles of general partners (who handle operations) and limited partners (who retain economic benefits but lack control).
Timing is also critical. To avoid the appearance of a step-transaction aimed solely at discounted gifting, wait several months after forming the FLP to begin gifting shares. Be sure to obtain a qualified appraisal to support valuation discounts and file all necessary tax documents, including Form 1065 and Schedule K-1s.
"The higher the discount, the more likelihood of an IRS audit." – Gunnar M. Crowell, J.D., Senior Advisor, American Heart Association
Long-Term Wealth Preservation Benefits
FLPs go beyond immediate tax advantages. As the general partner, you retain full control over investment decisions and distributions, even after transferring most of the economic interest to heirs. This setup also offers strong asset protection, as creditors of limited partners are typically restricted to charging orders. These allow creditors to receive distributions but prevent them from seizing assets or gaining voting rights.
Additionally, FLPs can simplify estate planning by converting out-of-state real estate into intangible personal property, avoiding ancillary probate. When heirs inherit FLP shares, they benefit from a step-up in basis to the fair market value, potentially eliminating capital gains taxes on prior appreciation. By combining income shifting, valuation discounts, and estate tax reduction, FLPs provide a powerful tool for transferring wealth across generations while keeping family control intact.
9. Defer Taxes with Stock Options and Equity Compensation Plans
Tax-efficient wealth management often includes strategies like deferring taxes through stock options and equity compensation plans. These tools give high-income earners a way to delay paying taxes while their investments grow. Here's how it works: Incentive Stock Options (ISOs) don't trigger income tax when granted or exercised. You only owe taxes when you sell the stock. On the other hand, Nonstatutory Stock Options (NSOs) require you to pay ordinary income tax at the time of exercise, based on the difference between the exercise price and the stock's fair market value.
Tax Savings Potential
Holding your shares for more than a year after exercising stock options can unlock long-term capital gains rates, which are lower than ordinary income tax rates. Instead of paying up to 37%, you'll pay 0%, 15%, or 20% on gains, depending on your income. For instance, in 2025, single filers with taxable income up to $48,350 qualify for the 0% rate, while those earning over $533,400 fall into the 20% bracket. Married couples filing jointly only hit the 20% rate if their taxable income exceeds $600,050.
Another option: reinvest your gains into a Qualified Opportunity Fund (QOF) within 180 days to defer taxes even further. This allows you to delay taxes until December 31, 2026, or until you sell the QOF investment. Plus, if you hold the QOF for at least 10 years, any appreciation becomes permanently tax-free. Thanks to the "One Big Beautiful Bill Act" of 2025, the Opportunity Zones program now runs indefinitely, and the Qualified Small Business Stock (QSBS) exclusion has increased to $15 million for shares issued after July 4, 2025.
Compliance with IRS Regulations
To qualify for favorable capital gains treatment on ISOs, you need to meet specific holding requirements: two years from the grant date and one year from the exercise date. Failing to meet these deadlines means your gains will be taxed as ordinary income. Also, exercising ISOs may trigger the Alternative Minimum Tax (AMT), which you'll need to report on Form 6251.
Be mindful of the wash sale rule when selling stocks for tax-loss harvesting. If you sell a losing stock and repurchase a "substantially identical" one within 30 days before or after the sale, the IRS won’t let you deduct the loss. Additionally, high earners should account for the 3.8% Net Investment Income Tax (NIIT) on investment income if their income exceeds $200,000 (single) or $250,000 (married filing jointly).
Here’s a quick comparison of ISOs and NSOs:
| Feature | Incentive Stock Options (ISO) | Nonstatutory Stock Options (NSO) |
|---|---|---|
| Tax at Grant | None | None (usually) |
| Tax at Exercise | None (but AMT may apply) | Ordinary income tax on spread |
| Tax at Sale | Capital gains (if holding rules met) | Capital gains on post-exercise growth |
| IRS Reporting | Form 3921 | W-2 (Wages) |
Long-Term Wealth Preservation Benefits
Deferring taxes allows your entire investment to grow without being immediately reduced by tax obligations. This approach is especially useful if you're managing concentrated stock positions from equity compensation. For diversification without triggering capital gains, you can use exchange funds, which pool your shares with other investors. However, these typically require a holding period of at least seven years.
Need liquidity without selling your stock? You can borrow against up to 50% of your stock's value. In some cases, the interest may be deductible as an investment expense, giving you cash for other opportunities or expenses while avoiding capital gains tax.
Bruce Brumberg, Editor-in-Chief of myStockOptions.com, sums it up well:
"The US tax code provides a few perfectly legal ways, depending on your income, financial goals, and even life expectancy, to defer or pay no capital gains tax."
10. Shift Income to Lower-Tax Jurisdictions Legally
Let’s dive into another legal tax-saving strategy for high-income earners: shifting income by relocating strategically.
By moving to states with no income tax or positioning assets and businesses in tax-favorable locations, high-income earners can significantly reduce their tax obligations. Currently, eight states impose no state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Meanwhile, high-tax states like California are considering aggressive tax measures, such as a proposed 5% wealth tax on residents with net worths exceeding $1 billion.
This trend has already prompted moves from high-profile entrepreneurs. For example, Larry Page and Peter Thiel relocated to Florida, a tax-friendly state, following California’s tax proposals. Bill Ackman, CEO of Pershing Square Capital Management, expressed concern about such policies, stating:
"California is on a path to self-destruction. Hollywood is already toast and now the most productive entrepreneurs will leave taking their tax revenues and job creation elsewhere."
Tax Savings Potential
Relocating to a no-income-tax state can result in substantial annual savings. Beyond changing residency, another option is investing in Qualified Opportunity Zones (QOZs). These government-designated distressed communities offer tax deferral opportunities for capital gains reinvested within 180 days. If you hold the investment for at least 10 years, any new appreciation becomes permanently tax-free. John Pantekidis, Managing Partner at TwinFocus, explains:
"Any appreciation on that investment [Qualified Opportunity Zone] escapes tax permanently; that's an avoidance."
For business owners, restructuring a sole proprietorship into an S corporation in a tax-friendly state can help avoid the 4% Medicare tax and provide access to a 20% pass-through deduction. Additionally, the State and Local Tax (SALT) deduction limit will increase to $40,000 in 2025 under the One Big Beautiful Bill Act, with annual 1% increases through 2029. However, to take full advantage of these benefits, you must strictly follow IRS residency requirements.
Compliance with IRS Regulations
Shifting income successfully hinges on proving a genuine change of domicile. States like California and New York are known for auditing residents who claim to have relocated. To establish your new residency, you’ll need to spend over 183 days in the new state, update legal documents, and move your primary assets. Samantha Clark of ThePayStubs highlights:
"Tax residency planning... typically takes careful planning and attention to detail and is best handled by a well-qualified accountant."
For QOZ investments, the IRS requires a 10-year holding period to qualify for permanent tax benefits on new appreciation. Keeping detailed records is crucial, as dual-residency audits can be expensive if you cannot clearly prove where you reside. The IRS also monitors for abusive tax shelters through a hotline to report transactions lacking economic substance.
Long-Term Wealth Preservation Benefits
Reducing annual tax burdens allows more of your capital to stay invested, boosting long-term wealth through compounding. Relocating to a no-income-tax state not only shields your estate from aggressive state-level taxes but also enables income transfers to lower-tax-bracket family members through legitimate payroll arrangements. For instance, in 2025, children can earn up to $15,000 tax-free due to the standard deduction. Additionally, with the federal estate and gift tax exemption set to $15 million per individual (or $30 million for married couples) in 2026, combining residency planning with other strategies can help maximize wealth passed on to heirs.
Use Tools Like Monefy for Financial Planning
Managing your finances effectively is key to maintaining and growing wealth. But let’s face it - keeping track of deductions, contribution limits, and AGI thresholds can get overwhelming, especially for high-income earners juggling multiple financial strategies. For example, one executive managed to cut taxable income by an impressive $177,400 by implementing several strategies, all thanks to precise tracking. That’s where tools like Monefy come in, simplifying the process by combining expense tracking, investment monitoring, and receipt management into one platform.
Monefy makes it easy to categorize business expenses and track investments that tie directly into your tax planning. Its expense tracking feature helps organize deductible expenses across various business categories. On the investment side, the app supports tax-loss harvesting strategies, helping you spot underperforming assets that can offset capital gains, potentially lowering your ordinary income by up to $3,000. If you’re using a health savings account (HSA) as a long-term investment tool, Monefy's digital receipt storage lets you save medical expense receipts now, enabling tax-free withdrawals down the road during retirement.
The app also helps with timing charitable contributions to maximize deductions. By analyzing your annual spending patterns, you can strategically plan donations to surpass the 2026 standard deduction threshold of $30,000 for married couples. This precision becomes even more valuable in the evolving tax environment, where the SALT deduction grows to $40,000 but phases out at $500,000 for single filers and $750,000 for joint filers. As Jonathan Dane, CFA, CFP® at Defiant Capital Group, puts it:
"Tax planning for high-income earners isn't about loopholes; it's about leveraging the strategies available to you".
In short, financial tools like Monefy bring order to the complexity, helping you implement these strategies while keeping accurate records for compliance.
Conclusion
Legal tax strategies give high-income earners the tools to reduce liabilities and grow wealth that can stand the test of time. By taking advantage of deductions, credits, and exemptions, you can hold onto more of your earnings while building a financial legacy that lasts for generations. These approaches also help counteract tax-bracket creep - where inflation-driven pay raises push you into higher tax brackets - and prepare you for future tax obligations. Using methods like tax-loss harvesting and strategic asset placement, tax-efficient investing minimizes the "tax drag" on your portfolio, enhancing long-term returns. At the same time, charitable giving through options like Donor-Advised Funds or Qualified Charitable Distributions allows you to support meaningful causes while lowering your adjusted gross income. Together, these strategies not only reduce your current tax burden but also lay the groundwork for sustained financial growth. As Ben Fuchs, Certified Financial Planner at Fuchs Financial, explains:
"Tax strategies should balance quick wins with lasting wealth protection."
Navigating complex tax rules requires careful attention. The tax code includes intricate regulations like AMT, wash sale rules, and interest-tracing requirements, all of which can be overwhelming to handle on your own. That’s why working with experienced tax professionals or fiduciary financial advisors is so important. They can tailor strategies to fit your income, investments, and family goals.
It’s also crucial to stay ahead of changes in tax laws. For instance, the lifetime gift tax exemption is expected to drop from $13.61 million in 2024 to around $5 million (adjusted for inflation) in 2026 unless new legislation is passed. With tax laws in constant flux, staying proactive is key. Year-round planning, including strategies like tax-loss harvesting and income timing, ensures you’re ready to take advantage of new opportunities as they arise.
FAQs
What are the benefits of using a 1031 exchange for real estate investments?
A 1031 exchange allows real estate investors to postpone paying capital gains taxes by reinvesting the proceeds from selling one property into another like-kind property. This approach can help maintain more of your wealth while offering a chance to expand or improve your investments over time.
By delaying taxes, you can put a larger share of your proceeds back to work, which could boost your portfolio's value and increase potential income down the road. It also provides flexibility for making strategic upgrades or diversifying your real estate assets without facing an immediate tax hit.
What are some tax strategies high-income earners can use to boost their retirement savings?
High-income earners have several smart tax strategies at their disposal to boost retirement savings while keeping taxable income in check. One well-known method is the backdoor Roth IRA. This approach lets individuals sidestep income restrictions by first contributing to a traditional IRA, then converting it to a Roth IRA. The key advantage? Tax-free growth and withdrawals during retirement.
Another effective move is maximizing contributions to employer-sponsored plans like 401(k)s. If you're 50 or older, catch-up contributions allow you to stash away even more, further lowering your taxable income today. On top of that, using tax-efficient investing strategies - like tax-loss harvesting or placing tax-inefficient investments in tax-advantaged accounts - can help reduce your overall tax burden.
Charitable giving also plays a big role in tax planning. Tools like donor-advised funds or charitable trusts allow you to support causes you care about while securing meaningful tax deductions. These strategies not only help you give back but also protect and grow your retirement savings over time.
What are the rules for using a Family Limited Partnership (FLP) to save on taxes?
To take advantage of a Family Limited Partnership (FLP) for tax benefits, it's crucial to set it up and manage it in a way that complies with legal standards. This means treating the FLP as a genuine business entity by keeping accurate records, holding regular meetings, and sticking to the terms outlined in the partnership agreement.
The IRS keeps a close eye on FLPs to ensure they aren’t being used purely as a tool for tax avoidance. To steer clear of potential issues, make sure the partnership is properly formed, assets are transferred correctly, and day-to-day operations align with its stated purpose. Working with an experienced tax professional or attorney can help you navigate the process, stay compliant, and make the most of what an FLP has to offer.