5 Proactive Tax Strategies Every High-Income Earner Should Implement This Year

In this episode of The Retire Early, Retire Now Podcast, Certified Financial Planner Hunter Kelly dives deep into five powerful, proactive tax planning strategies designed specifically for high-income earners. Stop treating tax planning as a year-end scramble and start maximizing your financial efficiency all year long.

Key Topics Covered:

1. Front-Loading Retirement Contributions:
   • How to strategically maximize contributions to 401(k), 403(b), SEP, and Solo-K accounts.
   • Understanding when to choose pre-tax vs. Roth contributions.
   • Balancing cash flow and securing employer matches.
2. Backdoor Roth IRA Conversions:
   • Step-by-step breakdown of the backdoor Roth strategy.
   • Avoiding pitfalls with the Pro Rata Rule.
   • Why converting early in the year reduces tax complexity.
   • Strategies to double Roth contributions for married couples.
3. Optimizing Withholdings and Estimated Taxes:
   • How to avoid IRS penalties and prevent giving the IRS an interest-free loan.
   • Calculating safe harbor numbers and adjusting payments accordingly.
4. Tax-Loss Harvesting Opportunities:
   • Leveraging market volatility to capture investment losses.
   • Reducing tax drag in brokerage accounts.
   • How loss harvesting offsets future capital gains or ordinary income.
5. Maximizing Charitable Contributions:
   • Utilizing Donor Advised Funds for significant upfront tax deductions.
   • Benefits of "bunching" charitable gifts to exceed the standard deduction.

Bonus Tip: Family Income Shifting Strategies:

• How employing family members in your business can lower overall family tax liability.
• Teaching financial literacy and fostering early retirement savings for children.

Additional Resources Mentioned:

• Episode on Pre-Tax vs. Roth Contributions
• Episode on Direct Index Investing

Ready to take control of your tax planning? Schedule a complimentary consultation at PalmValleyWM.com and discover how proactive tax strategies can significantly enhance your financial future.

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Disclaimer: This podcast is for educational purposes only and should not be considered financial, tax, or legal advice. Please consult a professional advisor regarding your specific situation.

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Transcript

0:00

And welcome back to another episode of The Retire Early Retire Now podcast. I'm your host, hunter Kelly, certified financial planner, and today we're diving into five proactive tax planning strategies, specifically designed for high income earners. Tax planning should never be an end of the year scramble or merely part of the preparation process. Instead, it should be viewed as a year round process. As I always say, taxes are going to be your largest expense over your lifetime, so it is very important. To be strategic throughout the year when tax planning is viewed as a year end, scramble or overlooked, until it's time to file opportunities can easily be missed. So this means you're leaving money on the table or worse paying the IRSA tip. So a systematic year long approach ensures that you can consistently identify and leverage opportunities and hopefully substantially lower your tax burden over time. But before we dive in, let's go ahead and hear from you. If you're watching on YouTube, comment below, what's your favorite tax saving strategy? What's the one that's most effective or maybe even challenging to implement? I would love to hear from you and hear your experience. And if you're listening on your favorite podcast and app, please leave a five star review or share this with a friend. Now let's get started to explore five actionable strategies tailored for high income earners. Hopefully like you now. The first one should be the easiest one to implement, but it can be very important, and that is front load, those retirement contributions. So we want to maximize your retire retirement contributions. Likely if you're a high income earner, just contributing to a retirement account alone is not gonna be enough to save for retirement. So let's go ahead and get those dollars in there so that we have more time in the market, right? So your 4 0 1 Ks, your 4 0 3 Bs, your SEPs, maybe solo Ks early in the year so that we can get that money in there and get it investing, get it working for you. Especially a year like this year where we've had a little bit of a pullback and some volatility in the market. Great time to get into the market. Not that I'm about timing the market, but. It is a bit of an opportunity. So let's go ahead and try to front load those retirement contributions. Now, one of the things that we want to determine there is should it be pre-taxed or Roth? And that's gonna be based off your independent situation, or individual situation. And I've made a podcast episode about that. but we want to determine should we do Roth or pre-tax. the other thing is make sure your cashflow allows for it, right? If you're. Shoving$23,000 or, or more into, this account within a few handful of months, then your cash flow may be crunched. So maybe you need to spread it out a little bit longer. The other thing you want to consider is that employer match. Sometimes, or most of the time, if you're receiving a match, you're gonna want to defer this, contribution over the entire year. To continue to receive that match because they will not give you the match unless you're deferring in that payroll period. So maybe you front load a little bit up front, but making sure that you, have at least enough to get the match throughout the year. you don't wanna miss that free money, right? And so again, if, if the match is not something that you are worried about, because maybe you don't receive one, then go ahead and front load that up if your cashflow allows for it again, because. More time in the market to allow those dollars to start working for you. Now let's hop into strategy number two, backdoor Roth, IRA, planning. this is a common and ideal strategy for income, high income earners because again, you likely make too much money to directly contribute to a Roth IRA. So this would involve making a non-deductible contribution to your traditional IRA. And then hopefully immediately, converting that to a Roth IRA, I prefer to do these early in the year. this simplifies your tax tracking and reduces your com complexibility or complexity. And the one thing you want to be mindful of is the pro rider rule, meaning, you may have to owe a little bit of taxes if you have any. Traditional or pre-tax money in your IRAs. so we wanna make sure that that money is out of our IRAs and we only have that non-deductible contribution. Or those after tax dollars so that when we convert, we don't owe any taxes. And our tax and flexibility, is low. Right? Or complexity. I don't know why I keep saying complexibility. So complexity is low. if we do have a balance in our IRA, we'll owe a little bit more taxes.'cause the IRS rule says that we would have to convert some of that pre-tax dollars. But that's not the worst part about the rule. The worst pilot about the rule is now you have to track that every year until you get. That, those dollars out of your IRA and so that can be a bit of a pain moving forward. so we wanna make sure that all of the traditional or pre-tax dollars are out. And you can easily do that by maybe rolling that balance into a 401k plan, and then giving you a clean slate for the backdoor Roth planning opportunities. Or maybe you go ahead and just convert it because it's a small balance, knowing that you're gonna owe a little bit of taxes, but. Moving forward, you don't have to worry about it. And it's gonna be worth, the amount of taxes that you're paying at this point. And then the last point here is that if you are married, consider doing this for your spouse as well. Maybe your spouse doesn't work or, maybe they do work, but they just have a 401k that they've been contributing to whatever that situation is. but that allows you to double up that, that, backdoor Roth opportunity there, whether that's the$7,000 limit. If you're under the age 50 or above to,$8,000. just consider that as well. Strategy number three, this is often overlooked and when I do tax return reviews, I often see either underpayment, penalties, a or large returns, right? And so we want to review and adjust your withholdings for, whatever your employer is withholding or adjust your estimated tax payments, because we don't wanna underpay because we get penalized for that. We also don't want to give the IRSA loan, so it is essential to just review this every year, especially if your income is fluctuating from year to year because of bonuses or because of how you're paid, whether that's through commissions or maybe you start at some sort of consulting side of your. Income where you're getting 10 99 income now, whatever that may be. And so we want to, with adjust our withholding or, adjust our estimated payments accordingly. And so the way we do that is we start to understand what our safe harbor number is, right? That's going to be based off your prior year or your current year. Tax li liability. Obviously seek a financial planner that does tax planning or a tax professional to help you forecast those numbers. But then that will give you a great plan for either adjusting your withholding or your quarterly payments moving forward so that again, you're finding that, even balance of withholding too much or withholding not enough. The idea is that you receive$0 back, and you don't have to pay anything, the following tax year. again, we don't want to give the IRSA free loan. We don't wanna be penalized for underpayments. Number four, start tracking, potential tax a servicing opportunities. It's March. I wish I would've done this knowing that we were gonna have a volatile market. so I wish I would've done this in January knowing kind of what, what we've had in the market lately. but this has been a great opportunity to potentially capture some losses within your investment accounts, especially if you've just kind of dumped some cash in recently. the market has pulled back quite a bit, right? And so this is a great opportunity to go, okay, I have some big losers here. I can sell those, maybe get into something similar, or hold it in cash for 30, 31 days, to avoid those wash sale rules. And then now I can capture these losses and move moving forward. I can either take a deduction of$3,000 off my ordinary income, or I can save these for later, so as I sell later on. And potentially have capital gains, I can offset those gains with these losses. So years like this are great, to capture losses in volatile markets, right? so we wanna be looking for those opportunities and this should be a daily thing. That's what we do here at Palm Valley Wealth Management. We have systems, trading systems in place that is constantly looking for these opportunities, especially in years like this, so that we can capture those losses. and mitigate those taxes and those brokerage accounts because that's gonna be the biggest drag on, on those, investment returns. And those types of accounts is, taxes. So if we can avoid taxes by capturing some losses up front, then later on down the road, we may have 60,$70,000, hundreds of thousands of dollars of losses over time. to be able to use, to offset gains of either gains inside this particular account or maybe a business that we sell later on down the road. detailed all of this in my, episode called Direct Index Investing, so check that out. That was a few weeks ago, but this is a great time to check for losses, especially in volatile markets. Number four, if you're charitably inclined, one of the things that you can do, especially early on is utilize either. A, donor advise fund or bunching your, charitable giving, right? So donor advise fund, for the, quick and easy example is if I know I'm giving,$10,000 a year for the foreseeable future to my said charity, I can go ahead. I can create this donor advised fund. I can contribute a hundred thousand dollars. Take that tax deduction up front. And then gradually d uh, dis uh, disperse that those funds to the charity over a 10 year period. This allows me to reduce my income significantly, and I can do things like charitable giving. I mean, not charitable giving, but Roth conversions, or other types of distributions where I have taxable income coming in. And save on taxes. The other strategy is bunching my charitable giving. So with the standard deduction being so high, after 2018, a lot of times, people will bunch their charitable giving into every other year. So that one year they take the standard deduction, which is just under$30,000 if you're married. Um, and then the following year they'll give, more so that they can itemize and deduct more than that standard deduction off of their taxes. Right? Uh, so this is two, um, these are two strategies that you can kind of utilize, if you are charitably inclined. And so, again, this is a more complex strategy, so please seek a financial advisor or a tax planner, that is very well versed in these planning. strategies because again, you wanna make sure that you're, abiding by the IRS guidelines. surprise, we have a bonus tip, and that is shifting or family income shifting or family gifting strategies. So if you own a business, sometimes you can employ family members such as children for legitimate. business needs, and you can shift that income to them because you can pay them and lo into lower tax brackets. Uh, you could also allow them to, uh, contribute to things like Roth IRAs, so get them to work. obviously it teaches them some valuable lessons about hard work and running maybe a family business and things of that nature. but then allows them to start learning how money works. They can start saving for their retirement, things of that nature. so that's just a bonus tip that we'll talk about today. five things that we talked about today. Front loading those retirement contributions, utilizing your back to Roth IRA contributions, adjusting your withholdings or estimated taxes. taking advantages of tax loss, harvesting opportunities, and maximizing those charitable deductions through donor advised funds or bunching, those charitable contributions. And so if these are strategies that you're interested in, but you're like, I do not know how to implement these, these are things that I help clients with every single year. go to my website, Palm Valley wm.com. You can schedule a free call. Uh, with me and we can talk about your situation and hopefully get someone that can help you, whether that's me or maybe a tax advisor, CPA, uh, for your tax planning needs. Again, tax planning is not an end of the year scramble. It is a year-round planning opportunity. So, uh, keep that in mind. And again, if you're watching on YouTube, go ahead and subscribe to my channel. Like this video. If you're listening on your favorite podcasting, now leave a five star review and share it with a friend. And as always, thanks for listening and we will see you in the next one. This podcast is for educational purposes only. It is not meant to be tax advice, investing advice, or financial planning advice. Do not make decisions solely based on this podcast alone. Please seek a tax, financial, legal, or insurance professional when considering your own specific situation.