Taxes are a huge burden for low- and middle-income households, and to remedy this, the IRS offers a number of lucrative tax breaks. Take the Earned Income Tax Credit, for example, which offers eligible filers up to $6,318 back on their taxes. Parents with low or moderate enough earnings can also qualify for the Child Tax Credit, which, at its max, offers a $1,000 tax reduction per child under 17.
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But while low and middle earners have a host of tax breaks to benefit from, higher earners don't tend to be as lucky. Generally speaking, higher earners aren't eligible for most of the tax credits out there, and thanks to the ever-unpopular alternative minimum tax, many would-be deductions wind up going away for wealthier folks.
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That said, there are still a number of tax breaks that high earners can capitalize on. Here are a few that can be rather rewarding.
The mortgage interest deduction
Though all homeowners can benefit from the mortgage interest deduction, because higher earners tend to take on larger mortgages, this deduction can be particularly useful for the wealthy. Under the current law, you can take a deduction for the interest you pay on your mortgage provided your loan doesn't exceed $500,000 as a single tax filer, or $1 million if you're filing a return jointly. This deduction can be particularly lucrative during the early years of your home loan, when the bulk of your monthly payments are applied to the interest portion of your mortgage as opposed to its principal.
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Now because the mortgage interest deduction is said to favor the rich, lawmakers have been lobbying for years to get it to change. Not only are wealthier individuals more likely to own expensive homes with high mortgage payments, but tax deductions by nature are worth more to high-income taxpayers than they are to lower earners.
Tax deductions work by excluding a portion of your income from taxes, and your savings are based on your effective tax rate. If you're a high earner whose effective tax rate is, say, 35%, you'll get more from a tax deduction than someone whose effective tax rate is just 15%. Thankfully, the mortgage interest deduction hasn't yet gone away, so if you pay a lot toward your home loan, you can use it to lower your tax bill.
Deductions for charitable contributions
Being charitable can lower your taxes regardless of how much you make, but if you're a higher earner with more money to give, you stand to reap even more tax benefits. The average American taxpayer who takes a deduction for charitable contributions claims over $5,800. If you're a higher earner and can double that deduction, you'll save whatever amount is proportionate to your effective tax rate. Case in point: If you deduct $12,000 in eligible donations and your effective tax rate is 35%, you'll shave $4,200 off your tax bill.
Anyone who loses money on an investment can use that misfortune to his or her advantage. But if you're a high earner looking to lower your taxes, selling off poorly performing investments can work wonders for your ultimate bill.
Capital losses can be used to offset capital gains, regardless of how much money you make. If you have a year where you make $10,000 in gains but take the equivalent amount in losses, you won't pay a cent on your profits. Furthermore, if you have a net loss for the year, you can use up to $3,000 to offset your regular income. And, if your net loss for the year exceeds $3,000 after applying it against all capital gains, you can carry the remainder to future tax years and use it to offset income down the line.
While there are no specific benefits designed for wealthy taxpayers, there are certain deductions and provisions that tend to help higher earners more so than those at lower income levels. It pays to explore whatever options you can for lowering your taxes, even if you're not doing poorly for yourself -- because at the end of the day, we all work hard for our money, and we all want to keep as much of it as possible.
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