If you make $100,000 or more, you probably pay a significant amount of your income to the IRS every year at tax time. That makes it critical to look for tax deductions and credits that you can use to reduce your tax bill.
Unfortunately, high-income taxpayers don't get to take advantage of all the tax breaks that are available to those with lower incomes. However, there are a few deductions, credits, and other favorable tax provisions that can help those who top the $100,000 mark. If you use them, you can save thousands on your taxes come April.
1. Take advantage of lower tax rates on certain investment income
Investors can benefit from a variety of different provisions that reward certain types of investments with favorable tax rates. In some cases, investment income is tax-free, while other cases involve reduced rates that provide partial savings.
For instance, interest on municipal bonds issued by state and local governments is free from federal tax. Moreover, muni bond interest is also state income tax-free for the state in which the issuing government entity is located. Even though municipal bonds typically carry lower interest rates than taxable bonds, the effective after-tax yield on munis can be higher than on regular bonds -- especially for those who make six figures and are in higher tax brackets.
Qualified dividend and long-term capital gains income both get lower tax rates than ordinary income. If you are in the 25%, 28%, 33%, or 35% tax brackets, then the maximum rate on this investment income is 15%. Those in the higher 39.6% bracket have to pay a 20% maximum rate. But the savings from this provision rise as your income goes up, with those in the 25% bracket getting just 10 percentage points of savings, while those in the 35% and 39.6% brackets get almost 20 percentage points off their ordinary tax rates. Given that those who make $100,000 or more are in a great position to invest, these provisions can be easy to use to cut your taxes.
2. Use your home to produce the biggest tax breaks
Most homeowners are allowed to take mortgage interest and real estate taxes as deductions if they itemize. However, the tax savings for high-bracket taxpayers from taking a deduction are higher than they are for lower-bracket taxpayers. Moreover, because wealthier people can afford more expensive homes, the amounts they borrow and the corresponding taxes and interest they pay are higher than the corresponding amounts on more modest homes. Taxpayers can typically deduct interest on up to $1 million in home-purchase debt and $100,000 in home equity mortgage debt, so there's plenty of room for the well-to-do to have the IRS partially subsidize their mortgage loans.
Depending on how far above the $100,000 mark your income is, however, there can be a catch. If your income climbs above $259,400 for single filers or $311,300 for joint filers, then your itemized deductions start to get phased out. For every $100 in income you have above the threshold, you lose $3 in itemized deductions, and up to 80% of your itemized deductions can be taken away under this provision. Even with this caveat, taking more deductions from your home is an area in which high-income taxpayers can get a big break.
3. Max out your employer retirement plan contributions
There are no income limits on making contributions to a 401(k) or other employer-sponsored retirement plan at work, and that will let you save as much as $18,000 for those younger than 50 or $24,000 if you're 50 or older in 2017. Contributions are excluded from your income, and again, high-bracket taxpayers save more in taxes from income exclusions than their lower-bracket peers.
Occasionally, highly compensated employees aren't allowed to make full contributions to 401(k)s because of what are known as the anti-discrimination provisions of retirement plan law. Typically, though, most plans will pass the anti-discrimination tests, and even if they fail, you can often contribute at least some money toward a retirement plan during the year.
No one likes to pay tax, and those who make $100,000 or more pay a lot of it. By using these breaks, you can ease the pain and write out a smaller check to the IRS next spring.