I feel like I'm doing everything right but still paying a lot in taxes.
Retirement accounts are maxed, basic strategies in place, but I keep hearing people talk about reducing taxes more.
What are the main things high earners are actually doing?
How do high earners actually reducing taxes legally?
byu/Plus_Control_1824 inpersonalfinance
Posted by Plus_Control_1824
6 Comments
If its w2, you just pay a lot in taxes. C’est la vie
The goal is to max out as many deductions as possible. Most high earners do this by owning their own business.
Someone who isn’t me.. had a registered LLC which allowed someone to claim tax deductions on some food, mileage, lodging, interest etc. They were able to keep most profits unrealized and thus untaxed. This person made over $200K for last year and paid less than 12% in taxes, without the LLC they would have been liable for over 32%.
The highest “earners” do not earn, they accrue capital income which is taxed more favorably.
The tax system discourages working because earned income is taxed higher than income obtained by doing nothing other than holding assets.
If you want that to change then you have to change the tax system.
Businesses also have specific ways to be taxed differently than individuals. Structure a business correctly and you could have a business income of like 500k but only owe very minimal taxes due to how you do payroll and count benefits and other things. But you have to have that business income to then structure the rest of it.
They get tax-advantaged forms of compensation from their employer, including deferred compensation and incentive stock options.
Sometimes they also have a donor advised fund which lets them take a charitable deduction but they still manage the money until they make an actual donation. This can be useful if they have exceptionally high income one year but want to spread out charitable donations over several years. (Also sometimes used fraudulently for personal gain).
Pre-tax everything, 401k, hsa, commuter benefits. Get married. Itemized deductions: noncash donations, cash donations, car registration fees, mortgage interest. Tax loss harvesting. Scorp, schedule D