How to Reduce Taxable Income for High Earners (Legally)

Earning more is great—until you see your tax bill. At six figures and above, marginal rates of 32%, 35%, or even 37% mean significant portions of each additional dollar go to taxes.

But high earners also have access to more powerful tax reduction strategies. This guide covers advanced approaches for freelancers and business owners earning $150,000+.

Understanding High-Earner Tax Brackets (2026)

Plus self-employment tax of 15.3% (12.4% + 2.9%) on the first $168,600 and 2.9% on amounts above.

High earners face:

• Higher marginal rates
• Additional Medicare tax (0.9% on earned income over $200K)
• Net Investment Income Tax (3.8% on investment income for high AGI)
• QBI deduction phase-outs

These make tax planning even more valuable.

Strategy 1: S-Corporation Election

This is often the most impactful strategy for high earners.

How it works:

• Elect S-Corp tax treatment for your LLC or corporation
• Pay yourself a "reasonable salary" (subject to payroll taxes)
• Take remaining profit as distributions (NOT subject to SE tax)

Example at $250,000 net income:

Critical considerations:

• Must pay "reasonable compensation" (IRS scrutinizes low salaries)
• Additional costs: payroll processing, S-Corp tax return
• Works best for consistent income above $80,000

Strategy 2: Maximize Retirement Contributions

High earners can shelter substantial amounts in tax-advantaged retirement accounts.

Solo 401(k) maximum contribution:

• Employee deferral: $23,500 (plus $7,500 catch-up if 50+)
• Employer contribution: 25% of net self-employment income
• Total maximum: $70,000 (or $77,500 with catch-up)

At $200,000 income, this could mean:

• $23,500 employee contribution
• $46,175 employer contribution (25% of adjusted income)
• $69,675 tax-deferred (saving ~$23,000 in taxes)

Additional strategies:

• Add Roth option for tax diversification
• Defined benefit plan for those wanting to save $100K+/year
• Cash balance plan combinations

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Strategy 3: Defer Income Strategically

High earners have more flexibility to shift income between years.

Methods to defer:

• Negotiate project payments to span tax years
• Delay invoicing in December for January payment
• Use installment sales for large transactions
• Structure retainers with favorable timing

When to defer:

• Expected lower income next year
• Near retirement (lower future brackets)
• Large one-time income this year

Caution: Don't let tax tail wag the business dog. Cash flow matters too.

Strategy 4: Accelerate Deductions

Pull deductions into high-income years to maximize their value.

Timing opportunities:

• Prepay Q1 expenses in December
• Make equipment purchases before year-end
• Bunch charitable donations in high-income years
• Pay state taxes before year-end (SALT limits apply)

Section 179 deduction: Immediately expense equipment up to $1,220,000 in 2026 (instead of depreciating over years).

Strategy 5: Health Savings Account (HSA)

HSAs provide triple tax benefits:

1. Contributions are tax-deductible

2. Growth is tax-free

3. Qualified medical withdrawals are tax-free

2026 limits: $4,300 individual, $8,550 family (plus $1,000 catch-up if 55+)

Advanced HSA strategy:

• Fund HSA maximally
• Pay medical expenses from other funds
• Let HSA grow tax-free for decades
• Use in retirement (or anytime for medical expenses)

Requires high-deductible health plan (HDHP).

Strategy 6: Charitable Giving Strategies

For high earners who give anyway, optimize the tax benefit.

Donor-Advised Fund (DAF):

• Contribute appreciated stock (avoid capital gains)
• Get immediate deduction
• Distribute to charities over time

Bunching donations:

• Contribute 2-3 years' worth in one high-income year
• Itemize that year, standard deduction other years
• Increases deduction value in high-bracket year

Qualified Charitable Distribution (QCD):

• Age 70½+: Give directly from IRA to charity
• Satisfies RMD without increasing taxable income
• Up to $105,000 per year

Strategy 7: Real Estate Strategies

Real estate offers powerful tax benefits for high earners.

Real Estate Professional Status:

• If you spend 750+ hours in real estate activities
• Rental losses can offset active income (otherwise passive)
• Major benefit for high-earning side-hustle landlords

Cost Segregation:

• Accelerate depreciation on rental properties
• Front-load deductions to high-income years
• Works with new purchases and existing properties

1031 Exchange:

• Defer capital gains when selling investment property
• Exchange into like-kind property
• Potentially defer indefinitely

Strategy 8: Tax Loss Harvesting

For high earners with investment portfolios:

How it works:

• Sell investments at a loss
• Offset capital gains (any amount)
• Offset up to $3,000 of ordinary income
• Carry forward remaining losses

Year-end review:

• Identify positions with losses
• Consider selling and immediately buying similar (not identical) assets
• Avoid wash sale rule (30 days before/after)

Strategy 9: Qualified Business Income (QBI) Deduction Management

High earners face QBI deduction phase-outs:

• Single: Phase-out begins at $191,950, gone at $241,950
• Married: Phase-out begins at $383,900, gone at $483,900

Strategies to preserve QBI:

• Maximize retirement contributions (reduces taxable income)
• Accelerate deductions to stay under threshold
• Consider timing of income recognition

Strategy 10: State Tax Planning

For very high earners, state residency matters significantly.

No-income-tax states:

• Florida, Texas, Nevada, Washington, Wyoming, South Dakota, Alaska, Tennessee, New Hampshire (limited)

Considerations:

• Must establish genuine residency
• State still taxes business income if conducted there
• Personal factors matter too

Multi-state allocation:

• If working in multiple states, income may be allocated
• Structure carefully for optimal outcome

Putting It Together: High-Earner Tax Plan

Example: Freelance consultant, $300,000 net income

Note: This is illustrative. Your situation will differ based on state taxes, filing status, and specific circumstances.

Frequently Asked Questions

At what income should I consider S-Corp election?

Generally beneficial above $80,000-100,000 net income. Below that, the added complexity and costs may exceed savings. Above $150,000, it's almost always worthwhile.

Should I max retirement contributions or pay down debt?

Depends on interest rates. If investment returns expected to exceed debt interest (common with low-rate mortgages), retirement wins—especially with immediate tax benefits.

Is it worth moving to a no-tax state?

For very high earners ($500K+), the savings can be significant ($25K-75K+ annually). But it's a major life decision beyond taxes. Most people optimize within their current state.

When should I hire a tax professional vs. DIY?

At $150K+ income with self-employment, professional help almost certainly pays for itself. Complex strategies require expertise.

Get Personalized High-Earner Tax Strategy

AlphaTax helps high-earning freelancers optimize retirement contributions, project tax liability, and identify savings opportunities—all in real-time.

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