The more tax you pay, the more valuable tax breaks can be. Even though many favorable tax laws are designed so that anyone can theoretically take advantage of them, tax deductions are inherently more valuable for those who are in higher tax brackets. Below, we'll look at three key tax breaks that have no income limits preventing high-income taxpayers from using them -- and that are particularly well-suited to those earning $100,000 or more.
1. Mortgage interest and real estate tax deductions
Most Americans are familiar with the tax breaks available to those who own their own homes and itemize their deductions. In particular, mortgage interest is deductible on loans of up to $1 million to buy a principal residence or second home, and home equity loans of up to an additional $100,000 also generate tax-deductible interest. Moreover, state and local real estate taxes are also allowed as an itemized deduction.
Anyone can use these deductions, but there are a couple of reasons higher-income taxpayers typically take greater advantage of them. First, those who can only afford to buy more modest homes pay less for them, generating smaller mortgage payments and taxes that sometimes aren't enough to climb above the standard deduction. By contrast, it's much easier for high-value homes to dramatically exceed those standard deduction amounts. Secondly, because itemized deductions reduce your taxable income, their impact on your taxes depends on your tax bracket. For instance, those in the 15% bracket save only $150 on every $1,000 they pay in mortgage interest and real estate tax, but those in the 39.6% bracket save almost $400.
It's true that if your income is high enough, you can lose some of your itemized deductions. Once your income climbs above the $250,000 to $300,000 range, provisions start to phase out your ability to claim itemized deductions. However, those reductions are limited, and home-related deductions still play a vital role in helping higher-income taxpayers reduce their tax bills.
2. Preferential rates on certain types of investment income
Anyone who has investment income from qualified dividends and long-term capital gains can get a preferential tax rate. For those in the 10% and 15% brackets for ordinary income, a special 0% rate applies. Those in the 25% to 35% brackets pay 15% on these types of investment income, and 39.6% bracket taxpayers pay a maximum of 20% on qualified dividends and long-term capital gains.
The rate reductions are typically larger for those who are in higher tax brackets than in the lower ones. For instance, in the 10% to 25% brackets, in which most Americans fall, the maximum rate reduction is 15 percentage points. By contrast, those in the 35% bracket save 20 percentage points in tax, and top-bracket taxpayers save almost that much. Moreover, the fact that those who earn $100,000 or more are more likely to have substantial amounts of wealth to invest make the disparities between high-income and low-income taxpayers even greater.
3. Maxing out your employer-sponsored retirement plan
Workers of all incomes often have access to 401(k) plans and other employer-sponsored retirement savings options at work. For many, the capacity to save in a 401(k) is greater than they'll ever take advantage of, with huge maximum contribution limits of $18,000 for those who are younger than 50 in 2017, and $24,000 for those who are 50 or older. By putting money in a traditional 401(k), you shelter it from tax at your ordinary tax rate. Therefore, as we've seen above, the higher your tax rate, the greater the tax savings from making 401(k) contributions. In addition, the more you contribute, the more you can save over the course of your career by deferring taxes on the income and gains within your 401(k) account.
For some high-income workers, special laws preventing discrimination in 401(k) plans can limit contributions. However, in most situations, high-income earners don't have any problem contributing what they want and maximizing their potential tax savings as a result.
If you make $100,000 or more, your taxes are high enough to give you plenty of incentive to cut them. By looking specifically at these tax-saving opportunities, you can do everything you can to reduce your tax bill and keep more of your earnings out of the hands of the IRS.