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Stuck in a High Tax Bracket? Try These Reduction Strategies

Stuck in a High Tax Bracket? Try These Reduction Strategies

January 31, 2024

Let’s talk about tax brackets. They aren’t straight across the board but graduated based on income, meaning most taxpayers fall into more than one bracket. Current tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, and you could fall into as few as one and as many as all.

Example of how the brackets will work with the new 2024 rates:

  • If you have $50,000 of taxable income in 2024 as a single filer, you’d pay 10% on that first $11,600 - (which is $1,160)
  • You'd pay 12% on the chunk of income between $11,601 and $47,150 (which is $4,265.88)
  • And then you’d pay 22% on the rest because some of your $50,000 of taxable income falls into the 22% tax bracket (which is $627)
  • The total bill would be about $6,053 — about 12% of your taxable income, even though you're in the 22% bracket. That 12% is your effective tax rate.

So if you’re in a high bracket and not too happy about it, consider changing up the assets in your portfolio as a tactic to help ease the pain. If you have a traditional, SEP, or Simple IRA, consider if it’s advantageous to convert it to a Roth. If you’ve got money in an HSA and can pay medical expenses another way, it’s worth considering investing your HSA contributions for the long-term, where your earnings can grow tax-free.

A tax deferral strategy might be another consideration when it comes to your qualified retirement plans. "High-income earners over age 50 can save $30,500 in a 401(k)."2 You don’t pay taxes on dividends, interest, and capital gains until you actually take a distribution—and typically, by the time you retire, you’re in a lower tax bracket.

Cash-value life insurance might be another route to go down. This tax deferral strategy allows higher investment limits for contributions, and the money grows tax-free (withdrawals up to the amount of premiums paid aren’t taxed).

Having a high net worth doesn’t have to mean paying high taxes. With the guidance of tax and financial professionals, you can uncover better ways to manage your money. If you want to discuss options, give our office a call today at (704) 216-2260.

Adapted from Covenant Wealth Advisors & Nerd Wallet