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Individuals ● Business ● Tax Advisory ● Payroll Services
1441 Kapiolani Boulevard Suite 912
Honolulu, HI 96814
Diamond Head Tax Group - Oahu Tax Preparation and Filing in
the State of Hawaii serves Businesses.
We file their taxes, provide bookkeeping services and Business organization consulting.
As a small business owner or startup employee, company growth or stock gains may push you into a higher tax bracket. However, you don't have to accept a larger tax burden. With the right guidance, you can reduce your federal, state, and local taxes.
We'll explore 20 tax-saving techniques in this post that you can use to reduce your taxable income.
THE DEFINITION OF A HIGH-INCOME EARNER ACCORDING TO IRS
There is a little confusion in the IRS definition of a high-income earner.
Generally speaking, the industry reports two definitions:
1. The Tax Reform Act of 1976 mandates the annual reporting of data on individual income tax returns with income of $200,000 or more.
2. Taxpayers who fall into the top 3 tax brackets which in the 2023 tax year is anyone with income of $182,101 or more.
Revenue can come from wages, investment income, business transactions, and more. Understanding what the defines as income is vital for determining your tax bracket as your income increases Consulting a tax expert can help you employ strategies to reduce or defer your taxable income.
Tax strategy is complicated, and depending on your circumstances, there are many different strategies to lower your taxable income. When submitting your 2024-2025 taxes, take into account these 20 strategies to reduce tax income for business owners in Honolulu 96816.
1. RETIREMENT CONTRIBUTIONS
People can lower their taxable income both now and after retirement by utilizing a variety of tax-related retirement planning techniques.
Traditional 401(k) and Roth 401(k)
Employees can contribute pre-tax salary to a Traditional 401(k), allowing it to grow tax-deferred until retirement. This can benefit higher tax bracket individuals by their taxable income during their earning years.
A Roth 401(k) uses after-tax money, meaning contributions and earnings are taxed before deposit, but withdrawals in retirement are tax-free. This can be beneficial for those seeking tax-free income later or anticipating a higher tax rate in retirement.
Traditional IRA and Roth IRA
Traditional IRA allows contributions that may be fully or partially deductible based on income and employer plan involvement. Investments grow tax-deferred until withdrawal, offering immediate tax relief by reducing taxable income for the contribution year.
Roth IRAs use after-tax money, meaning contributions aren't tax-deductible, but eligible withdrawals, including earnings, can be tax-free. While contributions don't reduce current taxable, they offer tax-free withdrawals, benefiting those seeking financial flexibility in retirement or anticipating higher future tax rates.
Solo 401(k) and SEP-IRA
Solo 401(k) and SEP-IRA accounts are retirement savings plans for self-employed individuals and small business owners that provide tax benefits.
A Solo 401(k) enables both employer and employee contributions, the contribution limit and potential tax deduction. Earnings grow tax-deferred until withdrawal, while contributions reduce taxable income Similarly, SEP-IRA contributions tax-deductible for the company, lowering its taxable income.
2. CHARITABLE CONTRIBUTIONS
Making use of the different options to donate to charities might help you save money and lower your taxes.
Donor-Advised Fund
Donor-advised fund (DAF) is a charitable account managed by a public charity that allows contributors to make donations and receive immediate tax benefits. Donors can recommend grants to their chosen nonprofits over.
Donors to a DAF can deposit cash, securities, or assets, giving up ownership while keeping advisory control over investments and grant distributions. Contributions are tax-deductible, reducing taxable income, and donors can avoid capital gains taxes on appreciated assets donated.
Bunching Donations
"Bunching donations" is a strategic tax planning method that involves consolidating charitable contributions from multiple years into one tax year. This approach allows taxpayers to maximize deductions during a high-income year or when it's most beneficial tax-wise.
Donate Stock or Appreciated Assets
By donating appreciated assets, such as stocks or bonds held for over a year, to a donor-advised fund or a qualified charitable organization a donor can eliminate the capital gains taxes that would be incurred if they sold those.
Qualified Charitable Distributions
Individuals aged 70½ and above can donate directly to eligible charities from their Individual Retirement Accounts (IRAs) up to $100,000 through Qualified Charitable Distributions (QCDs), allowing them to exclude these payouts from their taxable income.
Charitable Lead Trusts and Charitable Remainder Trusts
In a Charitable Lead Trust, assets revert to the donor or designated non-charitable beneficiaries after a set period, while making fixed payments to charities. Depending on the trust's structure, donors may receive deductions on income, gifts, and taxes.
A Charitable Remainder Trust provides income to non-charitable beneficiaries for a set period or their lifetimes, after which the remaining assets are donated to charity. Donors receive immediate tax benefits and often avoid capital gains tax on the donated assets.
3. STATE & LOCAL TAX (SALT) DEDUCTIONS
Taxpayers can deduct certain state and local taxes from their taxable income through the State and Local Tax (SALT) deduction, including property, income, and sales taxes. The Tax Cuts and Jobs Act of 2017 set a limit of $10,000 ($5,000 for married individuals filing separately) on SALT deductions.
4. QUALIFIED SMALL BUSINESS STOCK (QSBS)
Qualified Small Business Stock (QSBS) refers to corporation shares meeting Internal Revenue Code criteria. Investors can deduct up to 100% of capital gains from QSBS sales from their income if held for over five years, subject to certain restrictions.
5. 83(b) ELECTION
The 83(b) Election allows workers or startup founders receiving equity compensation to pay taxes on their shares' market value at issuance instead of at vesting. This can provide tax benefits if you anticipate significant appreciation in the value of your shares or the startup, potentially saving you money sale.
6. TAX-LOSS HARVESTING
Tax-loss harvesting reduces taxes by selling investments at a loss to offset capital gains or up to $3,000 ($1,500 if married filing separately) of ordinary income each year. Losses can be carried over to future years, but be mindful of the wash-sale rule, which disallows tax benefits if a similar security is bought within 30 days of the sale.
7. QUALIFIED OPPORTUNITY ZONE INVESTMENTS
Qualified Opportunity Zones (QOZs) are economically distressed targeted for investment to boost growth. Investments in these areas are through Qualified Opportunity Funds (QOFs), which may offer tax benefits like potential tax exemptions and deferred capital gains taxes
8. DEDUCT MORTGAGE INTEREST
Homeowners can deduct eligible mortgage interest paid on their primary residence and possibly a second home from their taxable. Lenders report this interest amount on Form 1098, the Mortgage Interest Statement.
9. HSAs AND FSAs
Two kind of tax-advantaged accounts that can be used to cover qualified medical and other expenses are Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs).
Health Savings Accounts (HSAs)
Individuals with high-deductible health plans (HDHPs) can apply for Health Savings Accounts (HSAs). HSAs offer a "triple tax advantage" as contributions, investment gains, and eligible withdrawals are all tax-free. Using pre-tax funds for HSA contributions reduces taxable income for that year.
In 2024, the maximum HSA contribution is $4,150 for self-only coverage and $8,300 for families. Funds grow tax-free and withdrawals for qualified medical expenses also tax-free. HSAs can be invested retirement accounts, and the growth does not count toward next year's contribution limit.
Flexible Spending Accounts (FSAs)
FSAs are employer accounts enabling employees to save pre-tax dollars for eligible medical and dependent care expenses. Contributions lower taxable income, and tax-free withdrawals are allowed for qualified expenses. However, FSAs typically operate under a “use-it-or-lose-it” rule, resulting in lost leftover funds at year-end.
10. BUSINESS AND SELF-EMPLOYMENT TAX EFFICIENCIES
Numerous tax deductions and efficiencies are available to small firms and independent contractors to lower their taxable revenue.
Business Expense Deductions
This may encompass contributions to self-employment retirement plans, health premiums, vehicle expenses, and home office costs.
Qualified Business Income Deduction
The Tax Cuts and Jobs Act (TCJA) of 2017 introduced the Qualified Business Income (QBI) deduction, allowing business owners and independent contractors to subtract up to 20% of their qualified business income taxable income.
Business Entity Restructuring
Small firms and independent contractors can consult a tax adviser to select the most tax-efficient business structure, such as an LLC, S-Corporation, or C-Corporation. The right structure helps minimize personal risk and provides tax benefits by clearly separating business and individual owners.
11. QUALIFIED MEDICAL EXPENSES AND HEALTHCARE COSTS
Medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI) can be deducted if you choose to itemize on your tax return. This deduction includes various out-of-pocket expenses, such prescription medications, medical devices, and visits to healthcare providers.
12. QUALIFIED EDUCATION EXPENSES
Eligible educational expenses, including tuition, enrollment fees, and other related costs for a qualified student, may reduce taxes through tax credits and deductions.
13. TAX RESIDENCY PLANNING
In 2024, nine US states have no state income tax, and some also exempt investment. These states are ideal for high-income individuals, startup equity holders, and cryptocurrency investors looking to reduce their tax liability.
14. TAX-EFFICIENT INVESTMENT STRATEGIES
High-income earners can reduce their tax liability by using a variety of investing options.
Long-Term Capital Gains
Gains or losses on assets held for over a year are considered long-term and taxed at lower rates than short-term gains. Therefore, long-term investment strategies can significantly reduce taxes.
Asset Location
Asset location involves placing investments in accounts that maximize tax efficiency based on the tax treatment of the generated income. The goal is to optimize after-tax returns by utilizing different account types like Traditional and Roth IRAs and 401(k)s.
Tax-Efficient Funds
Tax-efficient funds are particularly suitable for taxable investment accounts as they employ various strategies to enhance after-tax returns. Two examples of tax-efficient options are index ETFs and municipal bond ETFs.
529 Plans
529 plans encourage education savings through tax benefits, offering tax-deferred growth and tax-free withdrawals for approved educational expenses. Hawaii further enhances this with additional tax incentives for contributions to the state's plan.
You don't have to open a 529 plan exclusively for a child; anyone can initiate one with themselves as the beneficiary and later transfer it to a child. This will allow for a longer investment period for the
529 funds.
Municipal Bonds
Investing in municipal bonds offers a key: the interest income is generally exempt from federal income taxes. Moreover, interest income from municipal bonds issued within the investor's home state is often excluded from state and local taxes, in addition to being federally tax-exempt.
15. ROTH CONVERSIONS
High earners can still contribute to a Roth IRA through a backdoor Roth IRA conversion. This involves contributing to a Traditional IRA and then converting it to a Roth IRA, which incurs taxes on-tax contributions and earnings. Once in a Roth IRA, funds grow and can be withdrawn tax-free in retirement.
High-income individuals with a workplace 401(k) should consider a backdoor Roth conversion, involving post-tax contributions to the 401(k and rolling them into a Roth 401(k) or Roth IRA. Note that not all 401(k) plans allow post-tax contributions.
16. REAL ESTATE INVESTING
You can use real estate in a variety of ways to reduce your tax liability.
Rental Property Depreciation
The IRS allows a tax deduction for a part of the yearly expenses related to rental property if it is used for business activities or other income-generating.
1031 Exchange
You can defer capital gains taxes by selling an investment property and reinvesting the profits in a new one through a Section 1031 Exchange, also known as a Like-Kind Exchange, which postpones your tax obligation.
17. DEFERRED INCOME
Different strategies to postpone job income may place you in a lower tax bracket for a certain year, depending on your circumstances.
Timing When You Exercise Stock Options
Exercising stock options, like ISOs and NSOs, can lead to complex tax obligations. The tax impact depends on your income tax level and the fair market value of shares, with different tax treatments for ISOs and NSOs.
Collaborating with a tax is advantageous for understanding the tax implications of exercising stock options, as Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) can vary based on individual circumstances.
Negotiate Deferred Compensation
Consider negotiating a deferred compensation plan to receive payments over time, depending on your offer. This can help high earners reduce their tax burden by delaying taxation until the income is received, potentially keeping them in a lower tax bracket.
Consider discussing the timing of year-end bonus payments and other funds. A substantial bonus may elevate you to a higher tax bracket, potentially increasing your tax liability based on your situation.
18. TAX-EFFICIENT NON-CHARITABLE GIVING
The IRS allows taxpayers to gift a specified amount annually to multiple recipients without reporting it on a gift tax return. This is the yearly gift exclusion, which varies each year. For 2024, the individual limit is $18,000, and for married couples, it’s $36,000.
19. ENVIRONMENTAL TAX BREAKS
The IRS provides tax credits for qualifying energy upgrades to your home, including solar, wind, geothermal systems, and improvements like doors, windows, and insulation. Environmental tax credits may also apply to second homes used as residences.
20. TAX-EFFICIENT ESTATE PLANNING
Certain estate planning strategies, such as irrevocable trusts or Beneficiary Defective Inheritance Trusts (BDIT), can your tax obligations by removing assets from your estate. It's advisable consult a tax professional or lawyer, as estate taxes are complex and require a deep understanding of the tax system for effective planning.
Tax Deduction FAQs for High-Income Earners
What are Tax Deductions?
Tax deductions, or tax write-offs, refer to expenses that taxpayers can subtract from their gross income to determine their taxable income, ultimately reducing their overall tax liability.
What is Form 1098?
In the US, provide borrowers who paid mortgage interest a tax form known as Form 1098, or the Mortgage Interest Statement. There are also Forms 1098-C for vehicle donations, 1098-E for student loan interest, and 1098-T for.
Should I Take the Standard Tax Deduction or Itemize Deductions?
Your financial situation will decide if you itemize deductions or take the standard deduction on your tax return. Consider both options to minimize your tax obligation, and consult a qualified tax expert for assistance during the filing process.
Working with our tax advisors at Diamond Head Tax Group in Honolulu, Oahu 96816, can help you achieve your goal of lowering tax liabilities if you require assistance with tax concerns pertaining to equity compensation, business ownership, self-employment, or any other particular tax scenario.
Our professionals are available at every stage, from thorough planning to tax preparation. Call us today!
10 Hawaii Tax Filings & Forms:
N-11 - Individual Income Tax Return
N-30 - Corporation Income Tax Return
N-20 - Partnership Return of Income
HW-14 Withholding Tax Return
UC-B6 Unemployment Quarterly Contribution Report
N-15 - Nonresident and Part-Year Resident Income Tax
N-35 - S- Corporation Income Tax Return
G-45 General Excise/Use Tax Return
HW-14 - Withholding Tax Return
HW-3 Employer's Annual Return and Reconciliation of Income Tax Withheld From Wages
BUSINESS TAX FILING
We are well-versed in business tax and accounting and can work with any business including partnerships,
S-corporations, C-Corporations, LLCs, corporations, and non-profits.
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Diamond Head Tax Group is a Honolulu locally owned and operated business that serves individuals and small and medium business. Services include tax planning and preparation, charitable tax planning strategies, social security taxation reduction, sales tax preparation, small business strategy development, QuickBooks setup, and payroll services. Clients appreciate Diamond Head Tax Group's help, advice, flexible hours, and thoroughness.
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