If you are a high earner with income only from traditional employment sources, it can seem like the tax code is stacked against you. Once you reach certain income levels, common deductions are often not available to you. If you have already contributed the maximum amount to your retirement accounts, it can seem as if there nothing left to do but write a bigger check to the IRS. There is some good news, though – there are still smart, legal strategies that can reduce your tax bill. Some are well-known, others are more nuanced, but all can make a real difference when used the right way.
Leverage Tax Credit Purchases
Unlike deductions, which reduce taxable income, tax credits reduce tax liability dollar for dollar. While most individuals think only of credits tied to personal activity (such as EV credits), sophisticated taxpayers can sometimes purchase transferable or assignable tax credits.
- Film and historic preservation credits: In states with active film or rehabilitation incentive programs, taxpayers may purchase credits at a discount to reduce state liability. In Colorado for example, historic preservation credits are transferable; film credits are not.
- These markets are complex, require careful due diligence, and are subject to regulatory oversight. Additionally, unless the secondary market offers the credits at a substantial discount, the out-of-pocket costs may end up approximately the same. These are best used when a large transferable credit purchase can be made in one year and the credits can be carried forward.
Note: when buying tax credits (whether federal, state, or transferable credits), make sure the credits are valid, enforceable, and legally transferable by obtaining proper documentation, verifying the chain of title, and checking regulatory approvals.
Form an LLC to Unlock Additional Retirement Contributions
Contributing the maximum amount to an employer 401(k) and a traditional IRA is an effective way to reduce taxable income while growing your retirement accounts, but high earners with consulting income, real estate, or side business ventures can form an LLC or S-Corp to create additional deductions and retirement contribution opportunities.
- SEP IRA: An LLC taxed as a sole proprietorship can contribute up to 25% of net earnings (capped at $70,000 in 2025);
- Solo 401(k): For those with no employees, this vehicle allows both “employee” and “employer” contributions, potentially doubling savings beyond workplace plans.
Business income does not need to be substantial; it can be just enough to justify plan establishment.
Explore Advanced Real Estate Strategies
Even if you are not a full-time investor, high earners can benefit from property-based strategies:
- Cost segregation studies: Accelerates depreciation on certain building components, allowing taxpayers to frontload deductions;
- Short-term rentals: In certain cases, losses from actively managed short-term rentals can offset W-2 income, rather than just offsetting passive income;
- Opportunity Zones: Investment in Qualified Opportunity Funds may defer capital gains and potentially reduce future tax exposure.
Charitable Planning Beyond Cash Donations
For those who give to charity regularly, optimizing the structure of charitable giving can yield significant tax benefits:
- Donor-advised funds (DAFs): Front-load multiple years of giving to claim a larger deduction in one high-income year;
- Gifts of appreciated securities: Avoid capital gains while receiving a deduction for fair market value;
- Charitable lead or remainder trusts: Advanced vehicles that blend estate and income tax benefits.
Consider Niche but Effective Deductions
There are often overlooked opportunities hiding in the code:
- Health Savings Accounts (HSAs): For those with high-deductible health insurance plans, contributions are triple-tax-advantaged meaning the contributions are tax deductible, the growth is tax free, and withdrawals for authorized expenditures are also not taxed;
- Section 1202 Qualified Small Business Stock (QSBS): Investing in qualifying startups may allow exclusion of up to $10M in future gains.
Timing and Structuring Income
Finally, remember that tax liability is often as much about when income is recognized as how much. Consider the following:
- Installment sales for real estate transactions to spread large gains across multiple years;
- Roth conversions in low-income years: Manage future tax brackets strategically if your income differs from year to year;
- Deferring bonuses or equity comp: Where employers allow, shift income to a year with lower exposure.
Key Takeaway
For high earners with limited deductions, advanced planning ranging from purchasing tax credits to structuring side income through an LLC can meaningfully reduce tax liability. These strategies require careful legal and tax guidance but can provide powerful long-term savings.
