Last-Minute Tax Moves for High-Income Individuals

For high-income individuals, tax planning often goes beyond the basics, involving sophisticated strategies that maximize deductions and minimize liability within a complex financial landscape. Who is considered a high-income individual? The IRS does not have an official threshold for “high income,” but generally, those earning above $200,000 annually (single filers) or $250,000 (married filing jointly) fall into this category. However, in the realm of tax planning, high-income typically refers to those in the top 1-2% of income earners, starting at around $500,000 annually for single filers. At these levels, individuals face unique tax considerations, including higher marginal tax rates, the Net Investment Income Tax (NIIT), and phased-out deductions.  If your income puts you in the top tax brackets, it’s essential to explore advanced tactics that can significantly impact your tax situation and protect your wealth.

1. Maximize Charitable Contributions with Donor-Advised Funds

For high-income individuals, donor-advised funds (DAFs) offer a powerful vehicle to receive a charitable deduction now while distributing the funds over time. By "bunching" multiple years' worth of donations into a DAF before year-end, high earners can claim a larger charitable deduction and reduce their taxable income in high-tax years.

To set up a DAF, taxpayers will need to contact their financial institution or charitable organization. Contribute cash, stocks, or other assets to maximize the deduction. This option allows for flexibility in future donations while still offering an immediate tax benefit.  Additionally, assets within the DAF will grow tax-free amplifying the charitable impact.

Keep in mind that contributions to DAF are irrevocable and cannot be retrieved for personal use. Additionally, administrative fees may apply depending on the organization, impacting the overall donation.

2. Set Up a Charitable Remainder Trust (CRT) for Income and Tax Deferral

A Charitable Remainder Trust provides high-income individuals a unique way to balance charitable giving with income generation. By transferring appreciated assets into a CRT, you receive an immediate charitable deduction, defer capital gains on appreciated assets, and generate income either for yourself or a beneficiary for a period, with the remainder going to charity.  Work with an estate attorney or financial planner to create a CRT. Decide on an income payout structure (fixed or percentage of the trust value), which may impact the charitable deduction amount.

Charitable Remainder Trust allows immediate charitable deduction, while deferring capital gains on transferred assets. This also provides an income stream, which can be tailored to support financial goals or retirement plans. Like the DAF, CRT’s are an irrevocable structure—once assets are transferred, they can’t be reclaimed and do require administrative maintenance and compliance to ensure tax advantages.

4. Leverage the Mega Backdoor Roth Strategy for Future Tax-Free Growth

The Mega Backdoor Roth is an advanced retirement strategy for high earners who are phased out of Roth IRA contributions. By making after-tax contributions to an employer’s 401(k) plan (if allowed) and converting those contributions into a Roth IRA, high-income individuals can enjoy tax-free growth without income limitations.  Confirm that your employer’s 401(k) plan allows after-tax contributions and in-plan Roth conversions. Make after-tax contributions before year-end, then convert these funds to a Roth IRA or in-plan Roth for tax-free growth.

The benefits of the backdoor Roth allows high-income earners to build tax-free retirement assets and bypasses traditional Roth IRA income limits for greater long-term advantages. Note that the backdoor ROTH requires a plan that supports both after-tax contributions and in-plan conversions. Plan rules and contribution limits may vary, so consulting with a plan administrator is key.

6. AMT Planning

High-income individuals can be subject to the Alternative Minimum Tax (AMT), a parallel tax system designed to ensure that higher-income earners pay a minimum level of tax. AMT liability can often be mitigated by adjusting certain deductions or income, such as deferring income to avoid a high AMT year or managing timing for deductible expenses.

Time Your Deductions: For taxpayers close to the AMT threshold, deferring deductions like SALT and charitable contributions can help. By “bunching” itemized deductions in alternating years, you may reduce AMT exposure while maximizing benefits in non-AMT years.

Examine ISO Timing Carefully: For taxpayers that have Incentive Stock Options (ISO), if you are going to exercise ISOs, consider timing exercises in years where total income may be lower or spread exercises over several years. This can help avoid a sudden spike in AMT liability.

Consider Private Activity Bonds: High-net-worth investors may want to avoid private activity bonds, as the interest from these bonds is added to AMT income and can increase AMT liability.

Utilize Credits: The AMT credit allows taxpayers who paid AMT in a prior year to offset regular tax in future years. Tracking these credits can reduce tax liability down the line. Reduces overall tax burden by minimizing AMT impact.

Note that not all deductions are treated favorably under AMT rules, limiting the available options.

Final Considerations

High-net-worth individuals can benefit significantly from strategic year-end tax moves, but each of these techniques carries specific risks and complexities. Consulting with an experienced tax professional is essential to tailor these advanced strategies to your financial situation while ensuring compliance with tax laws. By carefully implementing the right mix of tactics, high-income individuals can achieve greater tax efficiency, preserve wealth, and potentially enhance long-term financial growth. You can reach out to us at info@mkhstaxgroup.com if you need any assistance.