Top Tax Strategies for High-Income Earners in 2024

This guide explores the most effective tax strategies for high-income earners, providing actionable tips to maximize savings and reduce your tax burden in 2024.

Tax planning can feel like a maze of complicated rules and numbers, especially if you’re unsure where to start. You’re not alone if terms like “capital gains” or “IRA contributions” overwhelm you. Here’s the good news: tax planning is for more than just financial experts or high-income earners. With the right strategies, anyone can save money and secure more of what they’ve earned. Whether you’re managing business taxes or personal income, effective tax strategies can boost your savings.

1. Invest in Your Kids to Take Advantage of Their Tax Brackets

The Kiddie Tax strategy is a straightforward way to preserve wealth within your family. It allows a child’s unearned income up to $1,250 to be tax-free and the next $1,250–$2,500 to be taxed at only 10%. You can take advantage of these lower tax rates by opening investment accounts in your child’s name.

Example:

A $30,000 investment earning 5% annually would yield $1,500 in unearned income. By investing in your child’s name, the income is taxed minimally, saving you hundreds in yearly taxes.

2. Use the 10-T Election for Mortgage Interest Deductions

If you’re using home equity loans to fund a business or rental property, the 10-T election allows you to maximize deductions. This election ties the deductibility of mortgage interest to the loan’s purpose, offering flexibility.

How It Works:

If you take a $100,000 home equity loan to purchase a rental property, the 10-T election lets you deduct the interest on your Schedule E rather than lose the deduction entirely.

3. Add Property Taxes to Cost Basis with the Section 266 Election

The higher standard deduction introduced by the Tax Cuts and Jobs Act (TCJA) makes itemizing deductions more difficult. Property owners with unimproved land can use the Section 266 election to capitalize property taxes and interest.

Benefit:

Instead of deducting these expenses annually, you add them to the property’s cost basis, reducing capital gains taxes when you sell.

4. Invest in Municipal Bonds for Tax-Free Income

Municipal bonds are a smart choice for generating tax-free income. They are exempt from federal income tax and often state taxes, making them a valuable tool for reducing your overall tax burden.

Important Consideration:

Although municipal bond income is tax-free, it can impact the taxation of Social Security benefits or trigger the Alternative Minimum Tax (AMT), especially if invested in private activity bonds.

5. Open a 529 Plan for Education and Retirement Benefits

The Secure Act 2.0 significantly changed how we view 529 plans, offering more flexibility and control.  Beginning in 2024, beneficiaries of a 529 can roll over up to $35,000 into a Roth IRA, and the rollover is entirely tax-free.  The 529 plan must be open for at least 15 years to qualify.  And 529 plans are not restricted to only children.  Parents can also open an account, make annual contributions, and start the 15-year clock so they can roll over $70,000 into their respective Roth IRA.

Pro Tip:

If you’re looking for long-term savings opportunities, consider opening a 529 plan early to take advantage of this tax-free Roth IRA rollover option. Learn how retirement strategies are evolving with recent tax law changes.

6. Designate Minor Children as IRA Beneficiaries

Estate planning strategies became more complex after the 2020 CARES Act introduced new IRA distribution rules. However, minor children of the decedent can stretch distributions until they turn 21, offering a unique way to maximize inherited IRAs.

Special Consideration:

If the child is disabled or chronically ill, the 10-year liquidation rule doesn’t apply, creating additional tax-saving opportunities.

7. Reduce Capital Gains with Installment Sales

Are you planning to sell an asset with significant capital gains? An installment sale lets you spread the gain over multiple years, reducing the immediate tax burden. Discover how to optimize your business tax structure to save more.

Eligibility:

Installment sales work well for capital assets but are unavailable for inventory, dealer property, or sales to related parties.

8. Maximize the 0% Capital Gains Tax Rate

Taxpayers under certain income thresholds can benefit from a 0% capital gains rate. In 2024, single filers earning up to $47,025 and married couples filing jointly earning up to $94,050 qualify.

Why It Matters:

When your income is lower, strategic timing of asset sales can yield significant tax savings.

9. IRA Contributions After Age 70½

Previously, individuals over 70½ couldn’t contribute to traditional IRAs. However, the CARES Act eliminated this restriction, allowing older taxpayers to continue saving for retirement.

Tip:

If you’re still working in your 70s, make the most of this opportunity to grow your retirement savings while reducing your taxable income.

10. Leverage the Wash Sale Rule to Reset Your Cost Basis

When you sell securities at a loss, the wash sale rule prevents you from repurchasing the same security within 30 days and claiming the loss. However, selling low-basis securities for a gain and immediately repurchasing them allows you to reset your cost basis, reducing future taxable gains.

What to Watch For:

This strategy works only with securities sold at a gain, as losses are subject to wash sale restrictions.

Key Takeaways

Utilize Family Tax Brackets: Invest in your child’s name to take advantage of lower tax rates.

Tax Strategies for High-Income Earners: Deduct Mortgage Interest with the 10-T Election to maximize deductions for home equity loans used for business purposes.

Consider Municipal Bonds: Earn tax-free income while managing AMT implications.

Use a 529 Plan for Flexibility: Save for education or retirement with tax-free rollovers.

Spread Out Gains with Installment Sales: Avoid a sizeable one-time tax hit on significant asset sales.

Frequently Asked Questions (FAQs)

1. What are the best tax strategies for high-income earners in 2024?

High-income earners can maximize savings through strategies like leveraging municipal bonds, installment sales, and the 10-T election. Each of these approaches minimizes tax liabilities while aligning with current tax laws.”

2. What is the Kiddie Tax, and how can it help me?

The Kiddie Tax allows you to shift unearned income into your child’s tax bracket, saving on taxes for investment income up to $2,500.

3. Are municipal bonds always tax-free?

Municipal bond income is federally tax-exempt but may impact AMT or Social Security taxation in specific cases.

4. How does the wash sale rule impact tax planning?

The wash sale rule prevents you from claiming losses if you repurchase the same securities within 30 days, but it doesn’t apply to gains, making it a tool for resetting cost basis. Accurate bookkeeping can play a key role in effective tax planning.

5. Can I still contribute to an IRA after age 70½?

Yes! As long as you have earned income, you can contribute to a traditional IRA regardless of age, thanks to the CARES Act.

6. What is the Section 266 election?

This election allows property owners to capitalize property taxes and interest, increasing the property’s cost basis rather than taking annual deductions.

Conclusion

Tax planning doesn’t have to be intimidating. By incorporating a few straightforward strategies, you can save money and reduce stress—whether you’re a seasoned investor or just starting out. These steps aren’t about becoming a tax expert but understanding your options and taking advantage of opportunities that suit your situation. And remember, if you’re unsure about implementing these strategies, consulting a tax professional can help you achieve your financial goals.

High-income earners: the final weeks of 2024 are your last chance to secure key deductions, lower your tax burden, and build wealth. Don’t leave money on the table—get personalized guidance now and start 2025 in a strong financial position.