Tax-Filing Strategies for High-Earning Individuals

January 5, 2025

As filing season approaches, high-income earners face the challenge of navigating a complex tax landscape while seeking to preserve and grow their wealth. Strategic tax planning is essential for maximizing after-tax returns, reducing tax liability, and securing long-term financial stability. For high-net-worth individuals, a proactive and informed approach to tax planning can mean the difference between meeting financial goals and falling short.

Explore proven tax planning techniques to reduce taxable income, optimize your portfolio, and protect wealth through tax-efficient investing. From tax-loss harvesting to asset location strategies and tax-deferred accounts, these approaches ensure you make the most of your financial opportunities while minimizing tax exposure.

How to Reduce Taxable Income with Tax-Loss Harvesting

Tax-loss harvesting is a foundational strategy for reducing taxable income. By strategically selling investments at a loss, high-income earners can offset gains in their portfolios, reducing overall tax liability while keeping their investments aligned with long-term goals.¹

This process works by identifying underperforming assets within taxable accounts. Selling these assets realizes a loss, which can then offset capital gains from other investments.¹ Even if your losses exceed your gains, you can use up to $3,000 annually to offset ordinary income, with any remaining losses carried forward to future years.

For example, if you sold a stock at a $10,000 loss and also had $10,000 in capital gains from another investment, the gains would effectively be neutralized for tax purposes.¹ This allows you to rebalance your portfolio while benefiting from reduced tax liability.

To make the most of this strategy, be mindful of wash-sale rules, which restrict buying back the same or a substantially identical investment within 30 days of the sale.¹ Alternatively, you can reinvest in comparable assets to preserve your portfolio’s intended exposure.

Optimize Your Portfolio with Asset Location Strategies

Asset location strategies are critical for high-income earners who want to optimize their portfolios for tax efficiency. Different types of accounts—taxable, tax-deferred, and tax-exempt—carry distinct tax implications.

Placing investments strategically in these accounts can help lower taxable income and improve after-tax returns.¹

Here’s how asset location works:

• Tax-Deferred Accounts: Tax-inefficient investments, such as bonds or real estate investment trusts (REITs), generate regular taxable income.¹ These are best held in tax-deferred accounts like traditional IRAs or 401(k)s, where taxes on income and gains are deferred until withdrawal.
• Taxable Accounts: Tax-efficient investments, such as index funds or municipal bonds, generate minimal taxable income and are well-suited for taxable accounts.¹ Municipal bonds, in particular, offer tax-free interest income, which can benefit high-income earners.
• Tax-Exempt Accounts: Growth-oriented assets, such as stocks with high appreciation potential, are ideal for Roth IRAs, which allow for tax-free growth and tax-free withdrawals in retirement.

By aligning the suitable investments with the appropriate accounts, you can reduce tax drag and maximize the efficiency of your portfolio.¹

Take Advantage of Tax-Deferred Accounts

Tax-deferred accounts are powerful tools for reducing taxable income while allowing investments to grow unhindered by annual taxes. Contributing to accounts such as 401(k)s, traditional IRAs, or Health Savings Accounts (HSAs) reduces your current tax liability and sets the stage for long-term wealth accumulation.¹

For example, contributions to a 401(k) or traditional IRA are deductible from your taxable income, lowering your overall tax burden. HSAs offer additional advantages, providing triple tax benefits: contributions are pre-tax, investments grow tax-free, and withdrawals for qualified medical expenses are tax-free.¹

High-income earners should aim to maximize contributions to these accounts each year. For 2025, the contribution limit for 401(k)s is $23,500, with an additional $7,500 catch-up contribution for those aged 50 and older. For HSAs, the limit is $4,300 for individuals and $8,550 for families, with a $1,000 catch-up contribution for those aged 55 and older.

Additional Tax Strategies for High-Income Earners

In addition to tax-loss harvesting, asset location, and tax-deferred accounts, there are several other strategies high-income earners can leverage to reduce taxable income:

• Charitable Giving: Donating appreciated assets such as stocks or mutual funds can help you avoid capital gains taxes while claiming a deduction for the asset’s fair market value. This strategy is especially effective for individuals looking to support charitable causes while reducing their tax burden.
• Qualified Business Income Deduction: For business owners, the Qualified Business Income (QBI) deduction offers a significant tax-saving opportunity. Eligible businesses can deduct up to 20% of their qualified income. This deduction directly reduces taxable income and is a powerful tool for those who meet the criteria.
• Accelerating Deductions: High-income earners can also benefit from accelerating certain deductions into the current tax year, such as property taxes or mortgage interest payments.² This approach can help lower taxable income for the current filing season.

These strategies, when combined with a comprehensive tax plan, can significantly reduce tax liability and preserve wealth for future generations.

Why Choose First Western Trust?

Navigating the complexities of tax strategies for high-income earners requires expertise and a personalized approach. At First Western Trust, we specialize in creating tailored tax-smart investment strategies that align with your unique financial situation and goals.¹ Whether you’re looking to reduce taxes, optimize your portfolio, or protect your wealth, our team is here to guide you through every step of the process.

Take Action Before Tax Season

As tax season approaches, now is the time to review your financial strategy and implement proven techniques to reduce taxable income and protect your wealth. Strategies such as tax-loss harvesting, asset location, and maximizing tax-deferred accounts can significantly improve your tax liability and overall financial health.

Contact First Western Trust today to learn how we can help you achieve your financial goals with personalized tax strategies. Together, we’ll navigate the complexities of high-income tax planning to secure your financial future.

First Western Trust Bank cannot provide tax advice. Please consult your tax advisor for guidance on how the information contained within may apply to your specific situation.

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