If you’re a high earner in Texas, either a physician, energy executive, or business owner, you’re likely to face a big tax bill. Many clients having such profiles often come to us with a financial question: how to reduce taxable income for high earners?
Though the internet is full of checklists, what many people struggle with is an effective strategy. This is why the goal of our Houston CPA practice is our focus is on helping clients understand proactive, multi-year tax planning concepts that may support their overall financial goals.
So, here we’ll talk about strategies that may help high-income earners gain a general understanding of common tax planning considerations.
Capitalize on Your “Automatic” Tax-Advantaged Accounts
Before going for advanced strategies, many high earners begin with foundational tax-advantaged accounts. These tools may support overall tax efficiency and are widely used by high-income professionals.
1. Workplace Retirement Accounts (401k/403b)
Contributions to a traditional 401(k) are generally made on a pre-tax basis, which may help reduce your adjusted gross income for the year. The IRS sets contribution limits annually, including additional catch-up contributions for individuals age 50 and older. These limits can be found on the IRS website.
2. The Health Savings Account (HSA)
For taxpayers enrolled in a high-deductible health plan, an HSA is often described as offering multiple tax benefits, including:
- Contributions may be tax-deductible.
- Growth inside the account is generally tax-free.
- Withdrawals are tax-free when used for qualified medical expenses.
Many high-income professionals in Texas use HSAs as part of a long-term savings approach by allowing the funds to grow over time.
How to Reduce Taxable Income for High Earners Now and in the Future
Once the basics are in place, some taxpayers explore strategies that may influence their tax position over multiple stages of life. A key part of our tax planning and preparation work is helping clients understand the potential trade-offs between reducing taxes today and managing tax exposure in retirement.
The Backdoor Roth & Roth Conversions
High-income earners are often limited in their ability to make direct Roth IRA contributions. A “Backdoor Roth” refers to a process that may allow certain taxpayers to contribute to a non-deductible Traditional IRA and convert it to a Roth IRA. Roth conversions involve moving pre-tax funds into a Roth account and paying taxes at the time of conversion.
Whether a conversion is beneficial depends on income levels, timing, and long-term goals, so many taxpayers review this option with financial and tax professionals.
Tax-Loss Harvesting
For taxable investment accounts, tax-loss harvesting is a strategy where investors may choose to sell investments at a loss to offset capital gains. Up to $3,000 of net capital losses may also be used to offset ordinary income each year, based on IRS rules.
Additional Considerations on How to Reduce Taxable Income for High Earners
For those with significant income or assets, certain advanced strategies may offer additional tax considerations. These require careful planning and professional guidance.
A Strategic Approach to Charitable Giving
Some high earners use donor-advised funds (DAFs) as part of their charitable giving approach. A DAF allows donors to contribute assets, such as appreciated securities, and recommend grants to charities over time. In many cases, donating appreciated assets may allow taxpayers to avoid recognizing capital gains and may provide a charitable deduction subject to IRS rules and limitations and individual tax circumstances.
Financial institutions such as Fidelity offer general educational resources about how these funds operate.
Alternative Investments with Tax Advantages
Some Texas taxpayers review how certain types of investments are treated for tax purposes. For example, oil and gas drilling projects receive specific tax treatment under federal law, including deductions for Intangible Drilling Costs (IDCs). These deductions can be substantial depending on the investment structure, but they also involve risk and should be evaluated carefully with financial and legal advisors.
We recently worked with a physician in Dallas who had questions about how an oil and gas investment she was considering might affect her tax reporting. After she reviewed the investment with her financial advisor, we helped her understand the tax implications and potential reporting requirements.
In her situation, the deductions associated with the investment may have helped reduce her taxable income for the year, depending on IRS rules and her overall tax profile. Outcomes vary widely and depend on a number of factors, so this type of planning generally requires individualized analysis.
So, How to Reduce Taxable Income for High Earners?
There isn’t a single solution. Most high-income earners benefit from a general, multi-step approach to tax planning that includes:
- Maximizing available tax-advantaged accounts
- Reviewing long-term strategies that balance current and future tax exposure
- Evaluating advanced tools that may offer additional flexibility
A plan aligned with your income level, goals, and timeline may provide a clearer picture of how to manage tax obligations over time.
If you’re a high-income earner in Texas interested in understanding how proactive tax planning may support your long-term financial strategy, the CPA-led team at Dabney Tax & Accounting Services can walk you through the relevant considerations. Contact us to learn more about the planning process.
Frequently Asked Questions
1. How do high-wage earners reduce taxes?
High earners often review tax-advantaged accounts, deductible opportunities, and overall financial structure to understand how their adjusted gross income may be affected. A CPA can help explain how these elements work within IRS rules.
2. How can someone legally reduce taxable income?
Common IRS-recognized approaches include contributing to retirement accounts, using HSAs (if eligible), tracking deductible expenses, and maintaining organized documentation. A CPA can help clarify which approaches may apply.
3. What is the IRS $600 rule?
The $600 threshold relates to certain third-party payments (such as Forms 1099-NEC or 1099-K). Understanding how these information returns work may help taxpayers avoid unexpected income reporting.
4. How do you avoid moving into the 22% tax bracket?
Tax brackets are based on taxable income. Adjusting contributions, managing the timing of income, and reviewing potential deductions may influence which portions of income fall into higher tax brackets. The right approach depends on each individual’s situation.
5. What are some considerations for high W-2 earners looking to reduce taxes?
Strategies may include maximizing employer retirement plans, using HSAs if eligible, reviewing charitable giving approaches, and understanding available deductions. A CPA can help evaluate which options may align with your goals and circumstances.
