If you earn around $250,000 or more a year, you’re in a relatively high tax bracket. And while earning more money is generally considered a good thing, it does come with its complications — and increased costs — especially when it comes to filing taxes.
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From reducing your risk of being audited to decreasing your tax liability, here are some tips for you before you file this year’s taxes.
Make Strategic Investments Throughout the Year
Upper-class earners tend to have a greater tax liability when tax season comes around. One way to reduce what you owe is to plan and invest strategically throughout the year.
“Focusing on strategic tax preparation throughout the year is critical,” said Hassan Sanders, an IRS-registered tax preparer and founder of DiabeticInsuranceSolutions.com. “High-income earners should look into tax-efficient investments, deductions, and credits to reduce their overall tax bill. This includes using retirement account contributions, charitable gifts, and other tax-advantaged techniques.”
Moira Corcoran, a tax expert and CPA at JustAnswer, also suggested maximizing your annual contributions to any 401(k)s, IRAs, FSAs, and HSAs to lower your taxable income. Many of these types of accounts offer long-term tax benefits as well.
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Keep Records of Everything
Keeping accurate records is vital to ensuring you don’t miss out on any deductions, overpay on your taxes, or get audited.
“High income earners need to be really cognizant now of the increasing audit risk from the IRS staffing up.” said Crystal Stranger, an enrolled agent, senior tax director, and CEO of OpticTax.com. “Anyone earning over $250,000 per year is in a relatively high risk bracket.”
Don’t wait until it’s time to file — start keeping records at the beginning of every year.
“Start a 2024 tax folder (digital or physical) now and start throwing this year’s tax items into that folder whenever they come up,” suggested Stranger. “Personally, I have an iCloud folder that I print to PDF anything I think might be useful for my taxes next year as it is too easy to forget things a year and a half later when filing taxes.”
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Cross-Reference Each Year’s Financials
Even if your income and expenses are roughly the same from year to year, it doesn’t hurt to cross-reference your information — just in case. If you find a new tax deduction, you could cut down on your tax liability.
“Take a few minutes to go back through last year’s calendar and make sure there aren’t income or deduction opportunities missed,” said Stranger.
Stay On Top of Tax Code Changes
“Staying on top of evolving tax legislation is crucial,” said Sanders. “Tax regulations are always changing, and high-income persons should be aware of any changes that may affect their tax situation.”
You may want to consult with a tax professional throughout the year as well. They can give you insight into any new changes, opportunities, or issues that might arise when it comes to filing.
Optimize How You File
If you’re married, you have the choice between filing jointly or separately. Be sure to weigh the pros and cons of each before you file as your decision could have a major impact on your tax liability.
“Always check filing status optimization between Married Filing Joint (MFJ) and Married Filing Separate (MFS),” said Stranger. “When state taxes are taken into consideration, I have seen several occasions where MFS was far more advantageous than MFJ and reduced taxes substantially.”
Plan Your Investment Gains and Losses Carefully
Selling investments could increase your tax liability, but the opposite is also true.
“If you sell an asset that is subject to capital gains, you can offset that by selling another asset at a loss,” said Corcoran.
On that note, consider the timing of when you sell your investments.
“If you have investments that have increased in value, it may be beneficial to wait to sell them until after the new year,” said Dana Ronald, a tax professional and CEO of Tax Crisis Institute. “This can help reduce your taxable income for the current tax year.”
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Prioritize How You Structure Your Finances
“Structuring is everything,” said Stranger. “So much can be done to optimize a tax position with business entities, balancing income out between the personal tax situation and the business entity structure.”
Consult a tax professional about any opportunities you might have to restructure your income or investments. You might be able to save money when you file.
Keep Up With Your Estimated Taxes
Estimated taxes are quarterly payments you make based on your reported income during that time. Business owners, independent contractors, freelancers, and other self-employed professionals usually have to pay these.
“Stay on top of estimated taxes,” said Mark Stewart, in-house CPA of Step By Step Business. “If you have extra income, make sure you’re paying enough in estimated taxes throughout the year.”
If you don’t pay enough, you may be faced with a tax penalty.
Maximize Your Deductions
“As a high-income earner, you should take advantage of all possible deductions and credits,” said Ronald. “This includes charitable donations, mortgage interest, property taxes, and retirement contributions.”
Itemizing your deductions can also be helpful when the total is greater than your standard deduction.
Work With a Tax Professional
Working with a qualified tax professional could be well worth the cost if you’re an upper-class earner.
“Most of the time, high-income earners are also business owners or self-employed individuals; that’s why having a trusted and experienced tax professional on your side is crucial,” said Ronald. “A stitch in time saves nine, and this phrase couldn’t be more true when it comes to taxes. I’ve seen many high-income earners who could have saved thousands of dollars if they had consulted with a tax professional beforehand.”
Taxes can be complicated, but having a tax expert on your side can streamline the process, minimize your tax liability, and ensure you’re getting the most out of your financial situation. They can also reduce the risk of you being audited by the IRS.
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This article originally appeared on GOBankingRates.com: 10 Tax Tips Upper Class Earners Need To Know
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