Tax Planning for High-Income Earners

This is not a menu of ideas you read about and think “neat.” These are the specific strategies we implement for high-income clients that show up directly in the tax return. Here we go-

S Corp Election and Reasonable Compensation

If you are a business owner earning $400,000 or more through your entity, your S Corp salary directly controls how much you pay in payroll taxes. Set it too high and you are overpaying FICA. Set it too low and the IRS reclassifies distributions as wages retroactively. Wonderful.

We run a reasonable compensation analysis that balances audit defensibility with tax efficiency. For a client earning $500,000 in S Corp net income, the difference between a $180,000 salary and a $120,000 salary is roughly $9,200 per year in payroll taxes – every single year. That number shows up on your W-2 and on your Form 1120-S. It is not hidden.

Sidebar: Reasonable compensation is not a fixed number. It is a range based on your industry, geography, hours worked, and the nature of your services. We document the analysis because if the IRS ever asks – and at your income level, the odds go up – you want a defensible answer, not a shrug.

Read more about S Corp tax preparation and optimization.

Retirement Plan Maximization

This is the single most powerful dollar-for-dollar deduction available to high-income business owners. Period. Full stop.

A solo 401(k) lets you defer up to $23,500 as an employee contribution (plus $7,500 catch-up if you are 50 or older) and up to 25% of your W-2 salary as an employer contribution. For most of our clients, that means $69,000 or more sheltered from current-year income taxes. At a 37% marginal rate, that is $25,500 in immediate tax savings from one strategy alone.

But here is where it gets more elegant. For clients who can contribute more – say $100,000 to $300,000 per year – we layer in a defined benefit plan. These plans are actuarially designed, meaning the contribution limits are based on your age and target retirement benefit. A 55-year-old business owner can often shelter $250,000 or more annually through a combined solo 401(k) and defined benefit plan. That is a $92,500 tax reduction at the 37% bracket. Show us another deduction that moves the needle like that.

These contributions show up on your 1120-S, your K-1, and your 1040. The return tells the story.

Pass-Through Entity Tax (PTET) Elections

The $10,000 SALT cap has been a thorn in the side of high-income taxpayers in high-tax states since 2018. The workaround? PTET elections, which are now available in over 30 states.

Here is how it works. Instead of you paying state income tax on your share of business income on your personal return (where it is capped at $10,000), the entity pays the state tax directly. The entity gets a deduction. You get a credit on your personal return. The net effect? You circumvent the SALT cap entirely on your business income.

Let’s say you live in California and your S Corp passes through $400,000 in income. Without PTET, your $52,000 in state income tax is deductible only up to $10,000 on your federal return. With PTET, the full $52,000 flows through as a business deduction. That is $42,000 in additional deductions at a 37% federal rate – roughly $15,500 in federal tax savings. For doing paperwork. We will take that trade all day.

Learn more about PTET and state tax strategies.

Income Timing and Deferral

High-income earners often have more control over when income is recognized than they realize. If you are a business owner, you can accelerate expenses into the current year or defer income into the next year depending on which year has the higher marginal rate.

Let’s say you know your income will drop next year because you are winding down a contract. Deferring $100,000 of income from a 37% year to a 32% year saves $5,000 in federal taxes alone. Conversely, if next year is going to be a monster year, you might accelerate income into the current lower-rate year.

This is not rocket science. But it requires knowing your numbers in real time, which means tax projections (more on that below).

Roth Conversion Strategies

Roth conversions are a long game. You pay tax now on the converted amount, but all future growth is tax-free. The question is never “should I do a Roth conversion?” The question is “is this the right year, and how much?”

For high-income clients, the math usually works in years where income dips – a sabbatical, a business transition, a year between major contracts. Converting $100,000 from a traditional IRA to a Roth in a year where your marginal rate is 24% instead of 37% saves $13,000 in taxes on that conversion. And every dollar of growth in that Roth is never taxed again.

We model this in our tax projections. The conversion shows up on your 1040 as income, and we plan for the tax hit so there are no surprises.

Charitable Giving Optimization

At high income levels, charitable giving becomes a tax planning lever, not just a generosity exercise. Three tools dominate-

Donor-Advised Funds (DAFs). You contribute a large lump sum in a single year, take the full deduction, and then distribute to charities over time. This is the bunching strategy. Let’s say you give $20,000 per year to various organizations. Instead, you contribute $100,000 to a DAF in one year, take the $100,000 deduction at 37% ($37,000 tax benefit), and then grant $20,000 per year from the DAF over the next five years. Same charitable impact. Massively better tax result.

Qualified Charitable Distributions (QCDs). If you are 70½ or older and have traditional IRA balances, you can distribute up to $105,000 directly to charity. It satisfies your Required Minimum Distribution without adding to your taxable income. That is a dollar-for-dollar exclusion from income, not just a deduction.

Appreciated stock donations. Donating appreciated securities directly to charity (or to a DAF) avoids the capital gains tax entirely while still giving you a deduction for the full fair market value. If you have stock with a $30,000 basis and a $100,000 value, donating it saves you both the $70,000 capital gains tax and gives you a $100,000 deduction. That is an elegant two-for-one.

Real Estate Strategies

Real estate is one of the most tax-advantaged asset classes available, and high-income earners who own property have several powerful tools-

Cost segregation studies. A cost segregation study reclassifies components of a building into shorter depreciation lives, accelerating deductions into the early years of ownership. On a $2 million commercial property, a cost seg study might identify $400,000 to $600,000 in assets that can be depreciated over 5, 7, or 15 years instead of 39. In the first year alone, you could see $150,000 or more in additional depreciation deductions. At 37%, that is $55,500 in tax savings.

1031 exchanges. Sell an investment property, defer the entire capital gain by reinvesting into a like-kind property. We have clients who have rolled gains forward for decades, building significant real estate portfolios without ever paying capital gains tax on the sales.

Real Estate Professional Status (REPS). If you or your spouse qualifies as a real estate professional (750+ hours of material participation), rental losses are no longer subject to the passive activity rules. That means depreciation from your rental properties can offset your active business income, W-2 wages, or other non-passive income. For high earners, REPS status can unlock $50,000 to $200,000 in deductions that would otherwise be suspended. Huh? Yes, really. But it requires meticulous documentation of hours, and we take that documentation seriously.

Qualified Opportunity Zone (QOZ) investments. If you have realized capital gains, investing them into a QOZ fund within 180 days defers the gain. Hold the investment for 10 years, and any appreciation on the QOZ investment is tax-free. It is a long-term play, but for the right client with the right capital gains, it is a compelling strategy.

Capital Gains Planning

Capital gains are often an afterthought until the tax bill arrives. For high-income earners, long-term capital gains are taxed at 20% plus the 3.8% NIIT – that is 23.8% before state tax. Short-term gains are taxed as ordinary income. Planning matters.

Tax-loss harvesting. We review your portfolio throughout the year to identify positions with unrealized losses that can be sold to offset realized gains. Harvesting $50,000 in losses against $50,000 in gains saves $11,900 in federal tax (at 23.8%). Simple math, but you have to do it before December 31, not in April.

Timing of sales. If you are selling a business, a large stock position, or investment real estate, the timing of the sale relative to your other income can swing your tax bill by tens of thousands of dollars. We model the scenarios before you execute.

Installment sales. Spreading the gain over multiple years keeps you in lower brackets and can reduce or eliminate NIIT exposure in any single year. Selling a $2 million asset and recognizing $400,000 per year over five years often results in significantly less total tax than recognizing $2 million in one year.