This is a more “narrow” Weekly Whiteboard than usual, but the application is broad enough, that I am sending it out to you all.
As we move deeper into the year – and away from tax season (well, kind of) – many of our clients with significant W-2 wages are seeking strategic ways to minimize their current and future tax liabilities. While W-2 income typically leaves less room for deduction and deferral compared to business or investment income, there are still meaningful opportunities available to help you manage your future tax burden wisely.
The below points outline a range of strategies—some familiar, some less so—designed to help you keep more of what you earn, plan more effectively for your future, and, where possible, maximize available tax credits and deductions. Our goal is to help you build a resilient, tax-smart financial strategy. Whether or not it is right for you will require a deeper dive or a conversation with your CPA.
1. Maximize Retirement Plan Contributions
Okay, this one is easily the most obvious, BUT, one of the most effective and accessible ways to defer income taxes is through retirement savings vehicles. Here are the key opportunities to consider:
- 401(k) and 403(b) Plans: Maximize your employee contributions. For 2025, the limit is $23,500 if you are under 50, and $31,000 if you are 50 or older (including the $7,500 catch-up contribution).
- Traditional IRAs: While direct contributions may be phased out at higher income levels, contributing to a Traditional IRA and considering a “Backdoor Roth IRA” conversion can offer unique planning opportunities.
- Deferred Compensation Plans: If your employer offers a non-qualified deferred compensation (NQDC) plan, you may be able to defer a larger portion of your salary and/or bonuses into future years, potentially reducing your current year’s taxable income.
2. Health Savings Accounts (HSAs): Triple Tax Advantage
If you are enrolled in a high-deductible health plan (HDHP), maximizing your HSA contributions is a highly tax-efficient move. Contributions are pre-tax, growth is tax-deferred, and qualified withdrawals are tax-free. For 2025, the contribution limits are $4,300 for individuals and $8,550 for families, with an additional $1,000 catch-up contribution if you are over 55.
3. Charitable Giving: Strategic Philanthropy
Charitable contributions can offset a significant amount of taxable income, especially when strategically structured:
- Donor-Advised Funds (DAFs): Front-load several years’ worth of charitable contributions into a DAF in a high-income year to maximize itemized deductions while granting funds to charities over time.
- Qualified Charitable Distributions (QCDs): If you are 70½ or older, direct distributions from your IRA to qualified charities can satisfy RMDs and avoid income taxes on the distributed amount. Also, the decreased Adjusted Gross Income can potentially lead to a lower medical expense deduction threshold AND a lower potential IRMAA number.
- Gifting Appreciated Securities: Rather than donating cash, consider gifting stocks or other appreciated assets directly to charity, thereby avoiding capital gains taxes and obtaining a full fair-market-value deduction. Limitations based on Adjusted Gross Income apply, so careful planning is required.
4. Employer Benefits Optimization
Don’t overlook employer-offered benefits that can offer meaningful tax advantages:
- Stock Options and RSUs: Consider strategies like an 83(b) election for stock grants or planning for long-term capital gains treatment where possible.
- Flexible Spending Accounts (FSAs): Max out contributions to health and dependent care FSAs to lower taxable income.
- Employers may also offer other tax beneficial benefits (e.g. education, adoption, child care, etc.):Some employer benefits are partially or fully tax-exempt.
5. Leveraging Credits and Deductions
Credits directly reduce your tax liability and are often more valuable than deductions:
- Lifetime Learning Credit: Even if you aren’t a traditional student, continuing education related to your profession may qualify.
- Energy-Efficient Home Improvements: Credits for solar panels, energy-efficient windows, and other upgrades are attractive, with some credits reaching up to 30% of the cost.
- Childcare and Dependent Credits: If applicable, don’t overlook these substantial credits.
6. Investment Strategies: Tax-Efficient Portfolios
While your primary income source is W-2 wages, investing in tax-advantaged vehicles can help with tax efficiency:
- Open and fund after-tax investment accounts: This one sounds self-serving coming from an investment advisor but it really is true that one effective way to balance out a long term tax burden is to grow an after-tax account. Not only does it serve you well in retirement – it can pay financial (and tax) dividends along the way.
- Index Funds and ETFs: Passive investment strategies tend to be more tax-efficient due to lower turnover compared to actively managed funds. Note – passive does not mean no analysis or strategy, just not highly active with regard to trading.
7. Advanced Planning Strategies
High-income earners may benefit from exploring more sophisticated planning:
- Roth Conversions: While your income may preclude direct Roth IRA contributions, strategic Roth conversions (especially in low-income years) can create future tax-free growth.
- Tax-Loss Harvesting: Even if you are not actively investing today, incorporating a disciplined tax-loss harvesting approach as you build taxable portfolios can provide future deductions (see the first bullet point in Section 6).
8. “Future-Proofing” Against Higher Taxes
Given the current fiscal climate and potential future tax increases, proactive planning is critical:
- Roth Assets vs. Traditional: Building tax-diversified retirement savings gives you flexibility to manage income and taxes in retirement.
- Permanent Life Insurance: Certain types of life insurance can offer tax-advantaged cash value accumulation and death benefits.
- Trust Structures: Establishing certain trusts can protect assets and create significant estate and gift tax advantages.
In closing, (and as I have written about before) tax planning is an ongoing, dynamic process, especially for high earners whose income is largely derived from W-2 wages. The strategies outlined here are starting points. The most effective tax plans are tailored to your specific financial situation, goals, and long-term vision.
At East Franklin Capital, we are committed to helping you not only preserve your wealth but strategically grow it with tax efficiency in mind. We invite you to schedule a time with us to review your current tax posture, explore new opportunities, and create a personalized, forward-looking strategy.
Possible Next Steps:
- If you are interested, we could schedule a tax strategy meeting to identify 2025 planning opportunities.
- For many clients we can work directly with your CPA to ensure their strategies are implemented properly.
And, as always, don’t hesitate to reach out with any questions!
