Advanced Tax Reduction Strategies: A Guide for High-Earners and Business Owners

The tax code provides simplified options for low and middle-income taxpayers to reduce their tax bills while saving for the future. Many of the most commonly used tax-advantaged savings options, such as traditional IRAs and 401(k)s, are either unavailable to high-income taxpayers or have annual contribution limits. As a result, high-income individuals and the owners of successful businesses often need to look to other options to both reduce their tax bills and pursue tax-advantaged investments.

There is a broad range of tax-advantaged investment options for high earners. The ones that may work best for you will depend on such factors as your income, tax situation, and long-term savings goals. Tax planning must also account for recent changes to tax law under the 2017 Tax Cuts and Jobs Act (TCJA) and the 2025 One Big Beautiful Bill Act (OBBBA). Both pieces of legislation made changes to the tax code that created tax benefits for certain high-income individuals, but they also rendered some older tax strategies ineffective.

In the sections that follow, we’ll examine some of the most popular tax-savings strategies utilized by high-income individuals and business owners, and assess the situations in which they are most effective. Since some strategies will only benefit taxpayers in specific situations or could result in higher tax bills if used incorrectly, consulting a tax attorney to ensure the chosen strategy has its intended effect is a wise option.

Tax-Free Investments

Sometimes the easiest way to reduce your tax bill is to ensure your income is not subject to tax in the first place. The tax code encourages some types of investments by either minimizing or eliminating taxes on them. The most common way to do this is through investments in municipal or treasury bonds, or mutual funds that invest in these bonds.

The income earned on municipal bonds is usually exempt from federal tax. In addition, investments in in-state municipal bonds may be exempt from state taxes. Income earned from U.S. Treasury bonds is also often exempt from state taxes. While the yields on these bonds may be lower than those on corporate bonds or stock investments, the tax savings often offset the lower income. Many investors turn to municipal and Treasury bonds for their tax benefits, but they also offer the advantage of being a dependable source of income that is not subject to the same fluctuations as the stock market.

“Mega” Backdoor Roth IRA Conversion

The advantage of a Roth IRA is that the IRA contributions are made with after-tax income, and withdrawals of contributions or investment income from the account can be made tax-free if the account holder is older than 59 ½. This is often a great deal for investors who either expect to be in a higher tax bracket when they reach retirement age or have after-tax income they would like to grow tax-free. However, investors with 2026 incomes of $168,000 ($252,000 for married filing jointly) can’t contribute to Roth IRAs.

High-income individuals can sometimes avoid the income cap by making after-tax 401(k) contributions to their workplace plans (contributions are normally made pre-tax). The mega backdoor Roth conversion takes advantage of the fact that the annual tax-free 401(k) contribution limit is significantly lower than the total contribution limit. For 2026, the pre-tax contribution limit is $24,500 ($32,500 for ages 50 and over), and the total contribution limit for 401(k) plans is $72,000 ($80,000 for ages 50 and over).

Using the mega backdoor IRA strategy, an individual can contribute $72,000 to their 401(k) for 2026, even though only $24,500 of that amount is tax-free. The taxpayer pays tax on $47,500 (the $72,000 total contribution minus the $24,500 tax-free portion) and then rolls the $47,500 into a Roth IRA. While they may be making too much to contribute directly to a Roth IRA, this strategy is acceptable to the IRS and allows that $47,500 to grow tax-free.

Not all 401(k) plans allow for this type of distribution. It’s a good idea to consult a tax lawyer to be sure your plan allows this before implementing it.

Maximized Tax Deductions

The tax benefits of itemized deductions are usually fairly straightforward. High-income taxpayers can sometimes use them to increase their impact. Let’s examine a couple of them:

• Business SALT deduction: The owners of pass-through businesses, such as partnerships and S corporations, can create a federal income tax deduction for state and local taxes (SALT) by paying state and local taxes through the business. For 2025, the SALT deduction for taxpayers who itemize is capped at $20,000 for individuals ($40,000 for married filing jointly), but businesses are allowed to deduct the full amount of state and local taxes owed.
• Deduction for investment interest: The U.S. Tax Code allows investors to claim a deduction for interest paid on loans used to purchase various investments, such as stocks and bonds. This deduction is allowed up to their total investment income for the year. Claiming the deduction for investment interest requires that the taxpayer document how the interest payments were tied to the investment proceeds.

To make sure you’re getting the most out of your tax deductions, consider speaking with a tax professional or a tax attorney.

Charitable Giving

High-income taxpayers can often structure their charitable contributions to amplify their tax benefits. Useful methods include:

• Donate appreciated stock: Owners of stock that has increased in value can enjoy a sizeable tax benefit by donating it, as they can claim a charitable deduction for the full fair market value (FMV). For example, if you were to donate stock with an FMV of $50,000 that was purchased for $10,000, you could claim a deduction of $50,000. In addition to the $50,000 deduction, the transaction avoids paying capital gains tax on the $40,000 difference between the purchase price and FMV (likely $8,000 for the 20% tax bracket).
• Donate required distributions: Taxpayers with traditional IRAs and 401(k)s are required to begin taking required minimum distributions (RMDs) at specified ages. The RMDs are taxable and must be taken, regardless of whether the money is needed. For 2026, an individual can donate RMDs up to $111,000 directly to charity and avoid paying income tax on that amount.
• Donor-advised funds: Donor-advised funds are charitable vehicles run by third parties that have been increasing in popularity in recent years. Charitable donations to the fund are deductible, and the funds are invested and grow tax-free. The donor then provides recommendations on how they would like the money distributed to nonprofit organizations.

Charitable gifts are impacted by the enactment of the OBBBA. Beginning in 2026, deductions for individuals in the highest tax bracket are capped at 35% of the donation. As a result, a $10,000 donation would only create a $3,500 deduction. In addition, charitable contributions must be more than 0.5% of the taxpayer’s adjusted gross income (AGI) to be deductible in 2026. This means that for taxpayers with an AGI of $50,000, only amounts exceeding $250 will be deductible.

Tax Loss Harvesting

Tax loss harvesting is when a taxpayer sells money-losing long-term capital investments to reduce the tax on profitable long-term capital investments. Capital investments are subject to capital gains tax. When calculating the tax, taxpayers can subtract their losses from their gains to reduce their capital gains tax liability for the year. Even if the taxpayer has no capital gains to offset for the tax year, they can still apply up to $3,000 to offset ordinary taxable income and carry forward unused losses to future tax years.

Beware of the Alternative Minimum Tax When Exercising Stock Options

The alternative minimum tax (AMT) was enacted to ensure that high-income taxpayers paid at least some taxes. The TCJA and OBBBA significantly reduced the number of taxpayers who must pay it, but one group of taxpayers is regularly subject to the tax: individuals exercising incentive stock options (ISOs).

Exercising an ISO involves purchasing stock at a discount, and the IRS treats the discount as equity compensation subject to the AMT. As a result, many of those exercising their ISOs are surprised by the hefty tax bill that results. Having a plan in place to minimize the AMT prior to exercising an ISO can significantly reduce your tax bill.

Tax Benefits for Business Owners

Successful business owners have additional options for minimizing their tax liability. Those often involve making the correct choice with regard to:

• Business structure: The manner in which a business is structured matters for tax purposes matters, especially for small businesses. Businesses operating as sole proprietorships, partnerships, S corporations, or C corporations are each taxed differently. Choosing the wrong entity type can increase the tax bills for both owners and businesses.
• Benefit plans: Correctly implementing a retirement plan can help reduce the taxes paid by the business, its owners, and its employees. For example, a self-employed individual can set up a solo 401(k) retirement account that allows up to $72,000 in tax-free annual contributions for 2026 ($80,000 for those over 50).

This is not an exhaustive list.

Estate Tax Planning

For generations, wealthy Americans took steps so that their heirs could limit their tax burden when they died. However, the TCJA and OBBBA increased the estate tax exemption to $15 million for individuals and $30 million for married couples. As a result, much of the former tax planning to avoid the estate tax, such as setting up trusts, is no longer an issue for all but the wealthiest taxpayers.

With so few Americans subject to the tax, much of the estate planning process has become complicated and should not be undertaken without consulting an attorney. If you believe you will be subject to the estate tax, you will likely need the kind of guidance that can only be provided by an estate tax attorney.

A Tax Attorney Can Help

Many of the tax-reduction options for high-income taxpayers involve making complex determinations regarding timing and eligibility. Making the wrong choice or failing to follow tax advice can result in the IRS imposing additional taxes, penalties, and interest.

A tax lawyer will help you assess your financial situation, investments, and future goals to develop a tax strategy that will ensure that you pay the least tax possible while taking home the most income. Tax planning is often about addressing problems before they arise, and tax attorneys know the types of tax-avoidance transactions that raise the IRS‘s suspicions and how to avoid them.