Lowering Taxes on Higher Incomes

For high-income earners, success often brings significant tax responsibilities. Whether you’re an executive, business owner, physician, or other high-income professional, a large portion of your earnings may be subject to federal, state, and local taxes. While tax obligations can’t be eliminated, there are legitimate and time-tested strategies that may help reduce your overall tax burden. Here are five approaches that high earners commonly consider as part of a broader tax planning strategy.

1. Maximize Retirement Contributions and Consider Deferred Compensation

Contributing to tax-advantaged retirement accounts is a foundational step for managing taxable income. For example, individuals can contribute to a 401(k), 403(b), or 457 plan, with contribution limits for 2025 set at $23,000—or $30,500 if age 50 or older. These contributions may lower current taxable income while also helping build long-term retirement savings.

In some cases, high earners may also have access to a non-qualified deferred compensation (NQDC) plan through their employer. These plans allow a portion of income to be deferred and potentially taxed in a future year when income levels—and tax brackets—may be lower. It’s important to understand that NQDC plans carry some risk, as the deferred funds are subject to the claims of the company’s creditors until paid out. For individuals at financially stable companies, however, this strategy might be a useful component of long-term tax and income planning.

2. Find Deductions with a Side Business

Establishing a side business may offer access to tax deductions that are not available to employees. Depending on the nature of the business and IRS guidelines, allowable deductions might include expenses related to a home office, internet service, professional development, equipment, and travel.

In addition to deductions, business owners may be able to establish retirement plans such as a Solo 401(k) or SEP IRA, allowing for additional pre-tax retirement contributions. Some businesses may also qualify for the Qualified Business Income (QBI) deduction, which can offer up to a 20% deduction on eligible income. These benefits are subject to eligibility requirements and income thresholds, so it’s important to assess your specific situation before moving forward.

3. Invest Tax-Efficiently and Use Loss Harvesting When Appropriate

Investment decisions can have a meaningful impact on tax exposure. For example, some individuals use tax-efficient investments—such as index funds, ETFs*, or municipal bonds**—in their taxable accounts. These products typically generate less taxable income compared to higher-turnover investments, and municipal bonds may provide tax-exempt interest income.

Tax-loss harvesting is another strategy some investors consider. By selling investments at a loss, individuals can offset gains elsewhere in the portfolio, and possibly reduce taxable income by up to $3,000 per year. Any excess losses can be carried forward to future years. While tax-loss harvesting can be useful, it should be implemented thoughtfully to avoid violating IRS wash sale rules.

4. Make Wise Charitable Contributions

Charitable giving is a values-based action that can also provide tax advantages when structured appropriately. Donating appreciated assets—such as stocks or mutual funds held more than one year—can allow donors to avoid capital gains tax while potentially receiving a deduction based on the asset’s fair market value.

High earners may also benefit from Donor-Advised Funds (DAFs), which allow for an immediate tax deduction while distributing the funds to charities over time. For individuals over age 70½, Qualified Charitable Distributions (QCDs) from an IRA may satisfy required minimum distributions (RMDs) while excluding the donation from taxable income. Strategies like “bunching” multiple years of charitable contributions into a single year can also help surpass the standard deduction threshold and make itemizing more beneficial. These strategies vary in effectiveness depending on one’s income, filing status, and charitable goals.

5. Seek Out Tax-Planning Advice

Income timing, deduction strategies, and investment decisions can all affect your tax situation. For example, delaying a year-end bonus, spreading capital gains across multiple years, or accelerating deductible expenses may help smooth out income and reduce exposure to phaseouts, surcharges, or the Alternative Minimum Tax (AMT).

Marriage Can Affect Your Tax Strategy

For LGBTQ individuals and couples—especially those who are high-income earners—marriage can have a significant impact on tax planning. With marriage equality now recognized nationwide, same-sex couples face many of the same planning considerations as opposite-sex couples. One important decision for high earners is whether to file taxes jointly or separately if married, particularly when one partner has significantly lower income or no income at all.

In some cases, marrying a partner with a lower income can lower the couple’s overall effective tax rate, especially when filing jointly allows them to access lower marginal brackets as a household. However, it’s not always beneficial. Known as the “marriage penalty,” two high earners filing jointly may find themselves in a higher tax bracket than they would be as single filers. Conversely, a high earner married to someone with little or no income may enjoy a net tax benefit from joint filing.

Deciding whether and when to marry can be a deeply personal and emotional decision, but from a financial standpoint, it’s worth exploring how it affects your tax situation, Social Security benefits, and estate planning. Given the complexity of the tax code and the variability of individual circumstances, working with a financial-planning professional and a qualified tax advisor can provide a coordinated approach. These professionals can help evaluate strategies in the context of your broader financial goals, ensuring that you consider not only the tax implications but also your long-term planning needs.

It’s important to note that no single strategy works for everyone. The best approach is often a tailored one, developed through thoughtful planning and regular review.

Stay Proactive with Future Changes

High-income earners face unique challenges and opportunities when it comes to taxes. By considering a combination of strategies and professional guidance, you may be able to work toward tax-efficiency and better align your financial plan with your long-term goals. As tax laws evolve and your income picture changes, staying proactive and informed remains essential.

*ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.​

**Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. Grace S. Yung, CFP®, is a Certified Financial Planner™ practitioner and the CEO & Founder of Midtown Financial Group, LLC, in Houston. Since 1994, she has helped LGBTQ individuals, domestic partners, and families plan and manage their finances with care and expertise. She is a Wealth Advisor offering securities and advisory services through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. Grace can be reached at grace.yung@lpl.com.For more information, visit www.midtownfg.com or www.midtownfg.com/lgbtqplus.10.htm.