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Minimizing taxes is an important part of building wealth and financial security, which is why there’s a lot to learn from people who have presumably done that already — people the IRS dubs “high earners.”
A look through IRS data on individual tax returns for 2013 and 2014, for example, reveals that some deductions are indeed more prevalent among people with at least $200,000 of adjusted gross income (AGI). The good news is they’re not just for high earners. Here are a few high-earner tax strategies that may work for you, too.
To reduce taxable income, most taxpayers can either take a standard deduction or itemize deductions. This will depend on your filing status, but currently the standard deduction is $6,300 for singles and $12,600 for married couples filing jointly. However, high earners often decide they can do better than that, according to the data. About 93% of them itemized deductions on their 2014 taxes, compared to 27% of everyone else.
Itemizing takes more work, because it means adding a Schedule A to your tax to-do list and identifying each deduction instead of taking the standard amount and being done with it.
Not everyone will have enough deductions to exceed what they’d get from the standard deduction. But it’s worth checking. For example, in tax year 2014, the standard deduction was worth 8% of AGI for the $50,000 to $100,000 AGI group. But itemizers in that group got about 12%.
2. Donate things in addition to cash
A full 86% of high earners took deductions for charitable contributions in 2014. A closer look at the more detailed 2013 data shows high earners often donate more than just cash. In fact, 57% of high earners who itemized their deductions for 2013 reported other-than-cash contributions, compared to 49% of people with AGI below $200,000.
Other-than-cash contributions can be clothing, furniture, cars, art and a variety of other things. But to get the deduction, they have to go to a “qualified organization,” generally a tax-exempt nonprofit. You’ll also have to estimate the fair market value of what you donate, and that can be tricky. The good news is that most tax-preparation software can do that for you, though you may have to enter each donated item individually.
It adds up: One pair of donated women’s jeans could get you as much as a $17 deduction, according to TurboTax’s It’s Deductible module, for example. A portable basketball hoop can net you up to $93, and even a frying pan is worth up to $10. If your donations total more than $500 for the year, you’ll probably need to file Form 8283.
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3. Don’t fear health savings accounts
Contributions to health savings accounts (HSAs) aren’t restricted to high earners, but you might think so if you look at the IRS data. High earners were much more likely to have HSA deductions in the 2014 tax year (4.64% of their returns had this deduction, compared to just 0.73% of other returns).
However, HSAs can generate tax breaks for regular folks, too, because the contributions are often deductible. To qualify for an HSA, you must be covered by a high-deductible health plan. You can use the money in your HSA to pay your insurance deductible, copays and other out-of-pocket health expenses. Unlike with a flex-spending account that “expires” at the end of the year, HSA money is yours to keep, which tends to encourage people to be more vigilant about health care costs.
4. Own real estate, if you can afford it
High earners were more than three times as likely to deduct mortgage interest — that deduction appeared on about 71% of their 2014 returns, compared to just 20% of returns with AGI below $200,000. For America’s high earners, this deduction reduced their AGI by a total of about $61 billion, according to the IRS.
And not only is mortgage interest deductible in most cases, property taxes are, too. A review of the IRS’s more detailed 2013 data shows that almost 93% of high earners who itemized took that deduction, compared with about 84% of everyone else.
All of these tax breaks aren’t just for high earners — you can probably benefit from them, as well. After all, nothing dampens the thrill of landing a higher-paying job, doing well on an investment or earning a bonus like realizing you’ll have to send a bigger check to the IRS.
This post was updated. It was originally published March 12, 2013.
Tina Orem is a staff writer at NerdWallet, a personal finance website. Email: email@example.com.
Image via iStock.