A six figure salary may sound great, but it doesn’t go as far as expected due to taxes and the cost of living. And, the higher your income, the more beneficial it is to regularly review your options to avoid tax exposure.
Here are seven mistakes that high-earners make:
- Not Maxing out Retirement Accounts: Not taking full advantage of retirement plans can mean missing out on tax-deferred growth and matching contributions from employers.
- Skipping HSA’s and 529’s: a HSA account may not sound appealing, but they have three tax benefits – money goes into the account before taxes, grows tax-deferred, and can come out tax free when used for qualified medical expenses. In most states, the money you save in a 529 plan is also tax deductible.
- Not taking deductions and credits: If you regularly give to charities, you may be eligible for deductions. Bunching charitable contributions can be one technique to reduce your tax liabilities. Business owners and freelancers who regularly use part of their home as their primary place of business may be eligible for home-office deductions
- Failing to keep records: Keep accurate records to prove what you are filing deductions for.
- Ignoring phase-outs: Be aware of which tax breaks you may become ineligible for if your annual salary surpasses $100,000. Roth IRA contributions and deductions on student loan interest are a couple examples to consider.
- Misreporting backdoor Roth IRA’s: Be thorough when reporting IRA contributions and conversions. It is a common mistake to either not report an IRA contribution and conversion at all, or to report a conversion from an IRA to a Roth IRA as taxable and end up paying double the taxes.
- Not understanding how bonuses are taxed: There are two ways that bonuses can be taxed – separately from your regular pay, or alongside your regular pay. If you’re in a higher tax bracket, be aware of how your bonuses are taxed and adjust your withholdings accordingly.
Read the full article on WealthManagement.com.