Living in Dallas and earning a high income already puts you ahead of the curve in Texas because we have no state income tax. However, this does not protect you from large federal tax bills. If you are serious about keeping more of your hard-earned money, it is a good idea to take control of your tax situation as soon as possible instead of waiting until April every year.
Dallas’s top earners know this, which is why they take action year-round to lower their tax bills. Here are some of the best tax reduction strategies to keep in mind. All are designed to help you make the most of your income, take advantage of the tax code, and save as much money as possible, legally.
Maximize the Use of Tax-Advantaged Retirement Accounts
Tax-advantaged retirement accounts are the foundation of any high-income earner’s tax reduction strategy. While everyone knows about traditional 401(k) and IRA accounts, there are also more advanced tactics you can use if your income and investments reach a certain level.
Try the “Mega Backdoor” Roth Strategy
A “Mega Backdoor” Roth is a two-step process for individuals who have a 401(k) plan that accepts after-tax contributions. Once you hit the plan’s annual contribution limit, you can make after-tax contributions to your 401(k) and roll them into a Roth IRA, letting your money grow and be withdrawn tax-free in retirement. The primary advantage is saving for the future without owing a big tax bill down the road. Keep in mind, future withdrawals may affect your retirement income, so plan ahead.
Consider Using a Health Savings Account (HSA)
Health Savings Accounts are one of the most valuable financial tools out there. Not only can you take a tax deduction for your contributions, but all investment growth and withdrawals are tax-free for qualified medical expenses. For high-income earners, this makes it a strong option for building an emergency medical fund for now and saving for future healthcare costs in retirement.
Look Into Deferred Compensation Plans
Executives at Dallas-based companies may have access to nonqualified deferred compensation arrangements offered by their employer. This is a formal plan that allows you to set aside a portion of your salary or bonus, and defer payment and taxation on that money to future years. Timing your compensation in this way can be especially useful when you believe you will be in a lower tax bracket in later years.
Use Smart Investment and Capital Gains Strategies
How you manage your investments is another critical piece of the tax reduction puzzle. The right tactics can help you keep more of your investment returns and avoid an unnecessarily large tax bill.
Take Advantage of Tax-Loss Harvesting
One way an investor can use tax-loss harvesting is by selling an investment that is at a loss to offset capital gains they’ve realized in the same tax year. This strategy can reduce your taxable capital gains. It is important not to violate the “wash sale” rule when harvesting capital losses, as the IRS does not allow you to sell a security at a loss and then buy a substantially identical one within 30 days.
Invest in Qualified Opportunity Zones
The City of Dallas, including the surrounding neighborhoods, has a number of Qualified Opportunity Zones. By investing your capital gains in a Qualified Opportunity Zone through a designated investment vehicle, you can defer the tax on your original gains, and potentially reduce the tax on future gains if holding-period requirements are met. This approach may reduce your tax burden while directing capital into projects tied to local economic development.
Manage Your Equity Compensation Strategically
Dallas executives, particularly in the tech sector, may receive certain types of equity compensation, such as Restricted Stock Units (RSUs) or Incentive Stock Options (ISOs). Understanding the tax implications and planning strategically when to sell, exercise, or otherwise dispose of these assets can significantly affect your tax situation at year-end. For instance, RSUs are taxed at the time of vesting, but stock options may trigger the alternative minimum tax (AMT).
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Give Smart and Take Deductions When You Can
Charitable giving is a meaningful way to give back to the community, and if you choose your strategy wisely, it can also be a sound tax reduction move.
Give with a Donor-Advised Fund (DAF)
Donor-advised funds are a way to give money or assets to a charitable organization, take an immediate tax deduction, and then recommend the disbursement of your assets to charities over time. One advantage of giving through a DAF is the opportunity to take the deduction in the year you give, instead of waiting for the funds to actually reach a charity. You may also be able to give appreciated stock or other assets held for over a year, which would otherwise be subject to capital gains taxes. This may allow you to deduct the full value of the asset on your taxes.
Take Qualified Charitable Distributions (QCDs)
Qualified Charitable Distributions are a way for individuals 70½ years of age or older to donate up to $100,000 per year (subject to IRS limits and annual adjustments). This is counted toward your required minimum distribution from your IRA but is not taxable income to you. It could also help keep your taxable income low, which might help you reduce the taxes paid on your Social Security benefits as well.
Explore Real Estate and Business-Related Tax Strategies
As a business owner or real estate investor in Dallas, you may have access to unique tax reduction strategies.
Real Estate Professional Status
If you and/or your spouse qualify as “real estate professionals” with the IRS, that can eliminate restrictions on your ability to use your rental real estate losses to offset other types of income, like your W-2 salary or business income. This alone can produce massive tax savings. To claim real estate professional status, you must meet certain material participation rules, so it’s important to understand those rules before you try to qualify.
Elect S-Corp Status for Your Business
Business owners can decrease the amount they pay in taxes by electing to have their business taxed as an S-Corp. If you own a profitable LLC, sole proprietorship, or other business structure, you can file with the IRS to be treated as an S-Corp. Once you are an S-Corp, you can split your business income into a “reasonable salary,” which is still subject to payroll tax, and a “distribution,” which is not subject to self-employment tax. Good bookkeeping is key to having a defensible distribution to the IRS. Document a reasonable salary for the work you perform, and make sure the election is based on legitimate business and tax considerations.
Get a Cost Segregation Study Done on Your Property
Cost segregation studies are an underused trick that real estate owners and developers can use to their advantage. If you own commercial property in the Dallas-Fort Worth area, a cost segregation study may help you qualify for faster depreciation of certain assets in that property. This accelerates your depreciation deductions, allowing you to reduce your taxable income and increase your cash flow at the crucial early stage of ownership, when the tax savings have the biggest impact.
Build a Tailored Tax Reduction Plan for Your Income
The tax reduction strategies above are just a few of the ideas available to high-income earners. Every situation is different, which is why it is important to work with a tax professional who can help you create and execute a tailored strategy that makes the most sense for your current financial picture.
Syd The CPA provides a wide variety of tax services for high-income individuals and other successful business owners in Dallas. We can help you with tax reduction and financial planning strategies that can help you protect and grow your wealth year-round, not just during tax season. To find out how we can help, contact us today for a consultation.