Earning a six-figure income in 2023 doesn’t necessarily stretch as far as it used to. According to the Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics in 2022, the average monthly expenses for American households are $5,577, which comes out to nearly $67,000, or neary 67% of a $100,000 salary. And then there’s the tax burden.
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Per Fidelity Investments, someone making $100,000 will pay about 18% to the IRS, meaning just about 15% of the salary is leftover for personal use. With inflation adding about 6% to the cost of goods, it’s easy to see how budgets are pretty strapped, even for six-figure earners.
While there’s not much an average consumer can do about inflation beyond being more frugal with expenditures and seeing where cuts can be made, certain things can be done when it comes to paying taxes for anyone making $100,000 or more. It really comes down to “lowering taxable income,” Bloomberg noted. Here are the most common mistakes keeping your tax bill high:
1. Failing to contribute the highest amount you can to retirement accounts
This tactic alone will save you in the short- and long-term. By contributing the maximum into your 401(k) or Roth IRA, you’re not only saving for the future, but the tax-deferred investments will bring down your adjusted gross income (AGI). “Not doing so means missing out on tax-deferred growth and matching contributions from employers” said Bloomberg. For tax year 2023, the maximums are $22,500 to a 401(k) and $6,500 towards an IRA for individuals; if you’re over 50, those numbers go up to $30,000 and $7,500, respectively.
2. Not taking advantage of HSAs
Like retirement savings, contributions to Health Savings Accounts (HSAs) are tax-deferred, which can help bring down your AGI. Not only that, but you can withdraw funds any time during the year for qualified medical expenses which provides a nice nest egg. For 2023, maximum limits are $3,850 for single filers and $7,750 for married couples and households. Bloomberg also suggested taking advantage of 529 plans for college expenses if you have children or grandchildren — they can be tax deductible in some states.
3. Forgetting to donate
Making charitable donations is a win-win feeling. You are doing something good for the benefit of your fellow humans, but also able to write off many of the contributions on your tax return. Bloomberg suggested the “bunching” method, which means making several years’ worth of donations in a single calendar year when your income is higher than normal to offset any larger tax burden.
4. Being unaware of all your deductions
High earners can’t always take advantage of options like the earned income tax credit, but there are others to watch out for — especially if you, like many other Americans, are now working from home. If you don’t have an office you go to, and your home is your workplace, you can deduct things like a portion of your rent or mortgage, utilities and other work-related expenses. A CPA can help you identify all the deductions you are entitled to in a given year. Just make sure you are keeping adequate records to protect yourself.
5. Not investing, particularly in dividend-paying stocks
Capital gains acquired through investments and assets are actually taxed at a lower rate than personal income taxes, so defraying your money into stocks can be a great way to bring down what you owe to the IRS while also making money on your investment. This is particularly the case with dividend-paying stocks, focusing on those that are qualified dividends which avoid being taxed as personal income, according to financial planners with the CMP agency.
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6. Being unwilling to consider incorporating
If you are a freelancer making six-figures, you may want to consider establishing an LLC or S-Corp in order to take advantage of small business tax perks. By creating your own company and making yourself an employee, your personal tax burden will be lower and your business will be able to reap many of the deductions allowed to organizations under 100 people.
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