If you are fortunate enough to have great paydays, you probably suffer from the high earner’s dilemma.
Especially if you live in and around desirable coastal cities, you pay a lot in taxes to benefit your local community, state, and others across the country.
Taxes Illustrated
Let’s say you live in New York City and make $775,000 per year. You are in the highest income bracket as married filing jointly so your federal tax rate is 37.0%. At this income level your state income tax rate is 6.85% and your local rate is 3.876%.
So if you make $775,000 per year your total income tax is about $295,000. That’s a lot of dough.
What Can You Do?
For someone who suffers the high earner’s dilemma, there are several things you can do:
- Max out 401(k) plan
- Max out IRA
- Contribute to a Health Savings Account (HSA)
First, reduce your income to reduce your taxes. This can be done in a variety of ways. This doesn’t mean taking a lower salary. There are ways to reduce your taxable income and they are very straightforward without taking a pay cut.
For example, max out your employee contributions to your 401(k) plan at work. The maximum you can contribute is $23,500.
Additionally, you can contribute to a Traditional IRA. The limit for 2025 is $7,000 per person.
Last is a Health Savings Account (HSA). An individual can contribute $4,300 and $8,550 for a family to an HSA.
These are simple and easy to do. They will help you save on taxes.
Capital Gains Taxes
Capital gains are also higher for high income earners. The breakdown of tiers for long term capital gains taxes is 0%, 15%, and 20%. Short term capital gains are at your ordinary income tax rate. Continuing with our example of married filing jointly at $752,000 per year, your long term capital gains taxes will be 20% and your short term capital gains tax is 37%.
So if you sold off $100,000 of stock that you owned for longer than a year, you will have to pay $20,000 of capital gains taxes.
So when selling investments, it’s best to try for long term capital gains. This isn’t always the case, because you may have to sell some investments that you have owned for less than a year.
Selling your winning and losing investments during the same year will also help reduce your capital gains taxes. The fancy term that some folks use for this is tax loss harvesting.
Inversion
Looking at this upside down, the more taxes you pay, the more money you make. The IRS gets a larger amount from you, but you also put more money in your pocket. Perhaps the high earner’s dilemma isn’t that bad after all. If you’d like to chat, that would be awesome!