Now that tax reform has become reality, countless Americans are anxiously waiting to see whether they'll come out as winners or losers under the new rules. And one group that may be particularly on edge is none other than higher earners.
Historically, higher earners have lost out on key tax credits and deductions by virtue of making too much. And since a number of key tax breaks just went away under the new laws, it's natural for higher earners to wonder how they'll ultimately fare. Luckily, there's some good news: If you're a higher earner, you can still capitalize on a number of tax breaks that are still very much alive and well. Here are a few to think about this year.
1. Tax-free retirement plan contributions
No matter your income, it's crucial to start saving for retirement throughout your working years, and in this regard, the IRS will throw you a bone even if you're a higher earner. If you contribute money to a traditional retirement plan, that money is deductible in the case of an IRA, or will go in tax-free in the case of a 401(k). Furthermore, while annual IRA contribution limits held steady this year ($5,500 for workers under 50 and $6,500 for those 50 and older), the yearly contribution limits for 401(k)s got a boost going into 2018. Now, you can sock away up to $18,500 annually if you're under 50, or $24,500 if you're 50 or over.
2. The mortgage interest deduction
Though the mortgage interest deduction has undergone some changes as the result of tax reform, it's still very much available. It used to be that you could write off the interest you pay on a home loan worth up to $1 million, but under the new laws, this threshold has been lowered to $750,000. Still, that leaves a fair amount of wiggle room for homebuyers with a higher income and price range. Furthermore, this change applies to new mortgages only. If you signed a $900,000 mortgage last year, you're still eligible to deduct its interest in full.
3. The SALT deduction
Many higher earners are up in arms due to changes in the SALT (state and local tax) deduction. Whereas that deduction used to be unlimited, it's now capped at $10,000 a year, which is bad news for higher earners in states where income and property taxes are excessive. On the other hand, a $10,000 deduction is better than none at all.
4. The charitable contributions deduction
Though giving to charity shouldn't boil down to shielding money from the IRS, it's hard to ignore the fact that the more generous you are, the more you stand to benefit tax-wise. If you're a higher earner who can afford to donate a decent chunk of money this year, you should know that the charitable contributions deduction remains unlimited. That said, be careful with what you claim, because if your total deduction appears disproportionate to your annual income, you'll increase your risk of an audit.
5. The Child Tax Credit
Up until recently, the Child Tax Credit offered $1,000 to filers with qualifying children under the age of 17. The problem, however, was that the credit started phasing out at $75,000 in income for single tax filers, and $110,000 for couples filing taxes jointly.
Under the new laws, however, the Child Tax Credit not only doubles to $2,000 per qualifying child, but becomes attainable for higher earners as well. That's because the income limits at which it begins to phase out have increased to $200,000 for single filers and $400,000 for married couples filing joint returns. Furthermore, unlike deductions, which work by exempting a portion of your income from taxes, a tax credit is a direct dollar-for-dollar reduction of your tax bill, which means it can really go a long way.
6. Lower taxes on long-term investments
Any time you make money from an investment, the IRS is eligible to get a cut (unless that investment is held in a tax-advantaged retirement account). But if you're willing to retain your investments for at least a year and a day before selling them, you'll keep more of your profits for yourself. That's because your capital gains will fall into the long-term category, and you'll be subject to a much lower tax rate than what you'd pay on short-term gains.
As was the case in years past, short-term capital gains are currently taxed as ordinary income, and even though most individual tax brackets have been lowered as a result of the aforementioned changes, they're still higher than the current long-term capital gains brackets, which are 0%, 15%, or 20% for top earners. In other words, if you're patient about selling investments, you can snag some additional tax savings.
Just because you're a higher earner doesn't mean you can't get a break on your taxes. Play your cards right, and you stand to hold onto more of your hard-earned money as the new tax laws play out.
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