Tax strategies high-income earners miss

[UNITED STATES] As tax season approaches, many high-income earners scramble to find ways to reduce their tax burden. While most are familiar with the traditional methods of tax deduction—like contributing to retirement accounts and utilizing itemized deductions—there are several strategies that are often overlooked, even by those who should know better. In fact, waiting too long to implement these tactics can result in missed opportunities for tax savings. Here’s a look at some of the most common tax strategies that high-income earners often overlook until it’s too late.

1. Maximizing Contributions to Tax-Advantaged Accounts

For high-income earners, retirement accounts such as 401(k)s and IRAs are valuable tools for reducing taxable income. However, many individuals fail to fully maximize their contributions to these accounts, especially when they approach the annual limit. In 2025, the contribution limits for 401(k)s are $22,500 for individuals under 50 and $30,000 for those over 50. Despite these high limits, many high-income earners fail to reach them, leaving money on the table.

Additionally, some high-income earners might be disqualified from making direct contributions to a Roth IRA due to income restrictions. However, a "backdoor Roth IRA" is a strategy that allows individuals to contribute to a traditional IRA and then convert it into a Roth IRA, bypassing the income limitations. This move can provide significant tax advantages in the future, as Roth IRA withdrawals are tax-free.

2. Utilizing Health Savings Accounts (HSAs) for More Than Just Medical Expenses

Health Savings Accounts (HSAs) are another tax-advantaged tool that is often underutilized by high-income earners. These accounts allow individuals to contribute pre-tax dollars to cover qualified medical expenses. But beyond just paying for healthcare costs, HSAs offer a unique triple tax advantage: contributions are tax-deductible, the money grows tax-deferred, and withdrawals used for medical expenses are tax-free.

Once the individual reaches age 65, they can even withdraw money for non-medical expenses without facing a penalty—though they will be taxed at ordinary income rates. This makes HSAs a powerful tool not just for medical expenses, but also for retirement savings. In 2025, the contribution limits are $3,850 for individuals and $7,750 for families, with an additional $1,000 catch-up contribution for those over 55.

3. Tax-Loss Harvesting: A Way to Offset Capital Gains

Many high-income earners tend to have substantial investments, which can lead to significant capital gains taxes when assets are sold. However, one strategy that is often overlooked is tax-loss harvesting. This technique involves selling losing investments to offset the gains made on profitable investments, thus lowering your overall taxable income.

While tax-loss harvesting doesn’t eliminate taxes altogether, it can reduce the amount owed. Moreover, high-income earners can apply up to $3,000 of net capital losses against ordinary income each year, with any remaining losses carried forward to future years. By working with a financial advisor or tax professional, individuals can optimize their investment strategy to minimize taxes over time.

4. Charitable Contributions and Donor-Advised Funds (DAFs)

Charitable donations are not only a way to give back to the community, but they also offer tax advantages. For high-income earners, the strategy of donating appreciated assets—such as stocks, bonds, or real estate—can be particularly beneficial. Donating appreciated securities directly to a charity can allow individuals to avoid paying capital gains taxes on the appreciated value, while also receiving a deduction for the full market value of the asset.

Another underutilized tool is the Donor-Advised Fund (DAF). This account allows individuals to make charitable contributions and take an immediate tax deduction, while having the flexibility to decide when and how the funds will be distributed to charity. Contributions to a DAF are tax-deductible in the year they are made, making it a great strategy for reducing taxable income in high-earning years.

5. Tax-Efficient Investment Strategies

Many high-income earners overlook the potential of tax-efficient investing, particularly when it comes to managing taxable accounts. Certain investment strategies, such as focusing on tax-efficient mutual funds or ETFs, can help reduce the overall tax burden. Tax-efficient funds are designed to minimize taxable distributions, which is particularly important for investors who are already in a higher tax bracket.

Additionally, some investments—such as municipal bonds—are exempt from federal taxes and, in some cases, state taxes. High-income earners who are looking to reduce their taxable income should consider incorporating tax-exempt municipal bonds into their portfolio, especially if they live in a state with high income taxes.

6. Considering a Roth Conversion Strategy

Roth conversions, while not suitable for everyone, can be a smart strategy for high-income earners looking to reduce their future tax burden. A Roth conversion involves moving money from a traditional IRA or 401(k) into a Roth IRA. While the conversion is taxable in the year it’s made, future withdrawals from a Roth IRA are tax-free, offering long-term tax benefits, especially if the individual expects to be in a higher tax bracket during retirement.

Timing is key when it comes to Roth conversions. Converting during a year when your taxable income is lower—such as after retirement but before taking Social Security—can make the tax hit more manageable. However, it's important to consult with a tax advisor, as the conversion will increase your current taxable income, potentially pushing you into a higher tax bracket.

7. Establishing a Trust to Minimize Estate Taxes

For high-income earners with significant wealth, estate taxes can pose a substantial threat to passing assets on to heirs. Establishing an irrevocable trust can help mitigate the impact of estate taxes by removing assets from the taxable estate. By placing assets in a trust, individuals can take advantage of the annual gift exclusion, which allows them to transfer up to $17,000 per person (2025) without triggering gift tax.

Additionally, charitable remainder trusts (CRTs) provide another way to minimize taxes. These trusts allow individuals to donate assets to charity while retaining the income from those assets for a period of time, ultimately reducing their taxable estate and providing tax deductions for the charitable donation. High-income earners have many opportunities to minimize their tax burdens, but it requires a strategic approach and a proactive mindset.

Many of the strategies outlined above are often overlooked, leaving money on the table and creating unnecessary tax liabilities. To fully take advantage of these tactics, it’s essential to plan ahead and work with tax and financial professionals who can tailor strategies to an individual’s unique financial situation. By doing so, high-income earners can ensure they are not only complying with tax laws but are also positioning themselves for long-term financial success.