11 Ways for High Earners to Reduce Taxable Income [2025]

Introduction: Smart Tax Planning for the Savvy High Earner

Entering 2025 will be an important time of tax planning for high-income earners. With the IRS announcing cost-of-living adjustments to the contribution limits and income thresholds, this eventful year will be a mix of challenges and mutually exclusive opportunities for tax minimization. Starting from 2019, I have helped numerous high-earning professionals in tax matters, and I've also witnessed that efficient tax planning saves these clients tens of thousands of dollars per year while also efficiently building wealth.

With laws regularly being rewritten and the time running out as certain provisions will expire after 2025, now is the best time to pursue varying incomes through using these powerful strategies. Here is a complete breakdown of eleven potent methods that high-income earners could use in reducing their gross taxable incomes while maximizing their retirement savings and investments.

1. Absorb Maximum 401(k) Contributions Under New Higher Limits

The IRS has raised the maximum annual salary deferral under the 401(k) plan in 2025 to $23,500, an increase of $500 from 2024, thus providing an excellent opportunity to shelter more income from taxation. If you are 50 years of age or older, you may make catch-up contributions of $7,500 and bring the total to $31,000.

The SECURE Act means that, if you're between 60 and 63 years old, you can make catch-up contributions in 2025 of $11,250, which is way beyond the usual catch-up amount. This provision for this specific age group creates a very important tax-saving opportunity that should not be wasted.

Pro Tip: A number of my clients have failed to consider employer matching contributions. Consider that matches are not counted in your individual contribution limit, so your total possible contributions to the 401(k) could potentially exceed $31,000. I have helped clients set up automatic payroll deductions to ensure they hit their max by year-end without straining cash flow.

2. Implement Backdoor Roth IRA Strategy

For the year 2025, the phase-out for direct contributions to a Roth IRA ranges from $150,000 to $165,000 for single filers and $236,000 to $246,000 for joint filers. If one's income overshadows these limits, the backdoor Roth IRA strategy remains an excellent way to avail tax-free growth benefits.

This backdoor method, again, involves two primary ways:

Traditional-to-Roth Conversion

Contribute to a traditional IRA (contribution has no income limits) and then convert to a Roth IRA. The limit for IRA contributions remains at $7,000 in 2025, with catch-up contributions of $1,000 allowed for those age 50 or over.

Mega Backdoor Roth Conversion

For those 401(k) plans allowing after-tax contributions beyond standard limits, this technique will provide for conversion of much larger sums into Roth accounts. I have aided a number of tech executives in applying this strategy to shelter an excess of $40,000+ annually in additional funds.

Important: Earnings accrued pre-conversion will be taxed, and Form 8606 must be properly reported. I always advise that a clean traditional IRA be maintained (pre-zero balance) in implementation so as to not get caught by a pro-rata tax.

3. Max out Health Savings Account Contributions

The HSA falls into the rare category of offering three potential tax advantages: tax-deductible contributions, tax-free growth, and tax-free distributions as long as the funds are used for qualifying medical expenses. The contribution limits for 2025 have been raised to $4,300 for individual coverage and $8,550 for family coverage.

HSA funds roll over indefinitely each year, with no expiration; hence, an HSA can become a long-term tax-advantaged vehicle and can further act as a secondary retirement account post-age 65.

Strategy Insight: I tell my wealthy clients to just pay medical expenses as they arise out of pocket and allow their HSA investments to grow tax-free for decades, essentially making it a special retirement account unlike any other in tax perks. This implies the tracking of all medical-related expense receipts so that they may be reimbursed tax-free at any later date.

4. Access and Utilize Flexible Spending Accounts (FSAs)

The FSA reference encompasses flexible spending arrangements. They allow pre-tax contributions to be made for healthcare expenditures. This scenario consequently diminishes one's taxable income. For the year 2025, the FSA limit for contributions has been increased to $3,300, with a carryover limit for unused funds set at $660.

While the use of these funds should generally occur within the plan year under a regular FSA, there is carryover provision that alleviates some of this burden. Setting up a dependent care FSA is an added method for taxpayers of higher income to decrease their taxable incomes through pre-tax contributions for childcare expenses.

5. Make the Best Use of Contributions to SEP IRAs for Self-Employment Income

Tax benefits, particularly for self-employed individuals or business owners, could ultimately be interesting through SEP IRAs. In 2025, contributions can climb as high as 25 percent of compensation or $69,000, whichever is less-majestically more generous versus ordinary 401(k) limits.

This, therefore, makes a very attractive scheme for substantial-phase tax deductions for self-employed professionals with a high-income track record. I have had physicians who run side consulting businesses and other independent professionals save several thousands of dollars in taxes by strategically putting money into their SEP IRAs.

6. Use the Qualified Business Income Deduction Before It Expires

Under the QBI deduction, qualified business income of a pass-through entity such as an S corporation, partnership, or sole proprietorship is to the extent eligible for a deduction of up to 20 percent.

In 2025, the background of income qualification thresholds' sighting would be $197,300 for being single and $394,600 for filing jointly, granting high-income business owners the full benefit of this deduction granted they fall under these thresholds.

Critical Timing Note: The deduction is set to sunset on December 31 of 2025, thus making this the final assured opportunity for claiming this highly valuable tax benefit unless legislative extension comes about.

7. Begin Strategic Tax-Loss Harvesting

Tax-loss harvesting is the selling of an investment that is now worth less than at purchase to realize a loss that offsets capital gains taxes on other investments that have appreciated. This is especially viable for being a high-net-worth individual with maximum capital gains tax rates of 20 percent plus the 3.8 percent Net Investment Income Tax.

Multiply capital gains are zeroed out under this strategy, and investors may be able to take up to $3,000 against ordinary income where losses exceed gains. Tax-loss harvesting, when done properly, can be used effectively to minimize present-year tax liabilities while clinging to the right investment allocation.

Expert Insight: Though many investors only think about tax-loss harvesting in December, I work with clients year-round to find opportunities in market corrections. This proactive approach has enabled many clients to significantly reduce their tax bills even in years of strong portfolio growth.

8. Utilize Age-Based Catch-Up Contributions

The SECURE 2.0 Act created more opportunities for retirement savings based on specific age ranges. As we mentioned earlier, catch-up contributions to workplace retirement plans of individuals aged 60-63 will be made significantly higher in 2025:

• 401(k), 403(b), and governmental 457(b) plans: $11,250 catch-up limit for those 60-63 (versus standard $7,500).
• SIMPLE plans and SIMPLE IRAs: $5,250 special catch-up limit for those 60-63 (versus standard $3,500).

Such age-unique provisions create especially valuable tax-saving windows specific to these years, allowing for the heavy reduction of taxable income while speeding up retirement savings.

9. Small Business Owner Considerations: SIMPLE IRA/Plan Contributions

For small business owners, SIMPLE IRA and SIMPLE 401(k) plans provide another tax-advantaged retirement savings opportunity. The contribution limit for 2025 is $16,500, and further catch-up contributions can be made.

Since such plans have historically afforded lower administrative costs than their traditional 401(k) counterparts, these would be attractive vehicles for smaller businesses while still offering significant tax advantages.

10. Maximize Cases Where Defined Contribution Limits Exist

For high earners who have access to defined contribution plans other than the traditional 401(k) plans, the maximum annual additions limit has been adjusted for 2025 with an increase to $70,000, and this limit refers to the total of all employer and employee contributions.

For an increase in this limit would be of particular importance for the high-income business owner or executive interested in joining plans where they are allowed higher contributions, i.e., profit-sharing arrangements, or those plans that permit after-tax contributions in excess of standard elective deferral limits.

11. Plan Around Income Thresholds and Phaseouts

High earners face a number of income-based phaseouts that raise tax liability once stepped over. Timing income strategically while managing AGI can diffuse the blow.

In 2025, major thresholds that one would pay attention to include:

• $350,000 compensation limit for qualified retirement plans
• $230,000 threshold for defining key employees in top-heavy plans
• QBI deduction phaseout thresholds: $197,300 (single), $394,600 (joint)
• Roth IRA eligibility phaseout thresholds: $150,000-$165,000 (single), $236,000-$246,000 (joint)

By appropriately timing income recognition, speeding up deductions, or deferring compensation, you can manage reportable income in correlation with the tax benefits that phase out with an increase in income.

Conclusion: Act Now for Maximum 2025 Tax Savings

The tax opportunities in 2025 are ripe but need some strategic thought and immediate execution. With several provisions about to expire at year-end, QBI included, this year marks a particularly opportune time for a comprehensive approach to tax planning.

As a finance professional who has guided high-income clients through changing tax landscapes since 2019, there is nothing more I can stress than the value of being proactive rather than becoming reactive. These strategies, in unison, have saved my clients millions of dollars in taxes and have also built stronger portfolios for retirement and other investments.

Remember that engaging in tax planning is an ongoing process and not a once-and-for-all event. Perhaps, you would want to speak with qualified tax professionals for assistance in formulating strategies that are tailor-made for your financial situation and goals. The sooner you act, the more you can lessen your tax bills for the year 2025 and accomplish long-term financial security.

Frequently Asked Tax Concerns for High Income Earners

What is the threshold of gross income for high earners for tax purposes in 2025?

While no definition exists, most tax professionals consider individuals earning over $200,000 per annum (or $400,000 for married couples) as high earners since they generally incur the highest marginal tax rates along with some other taxes like Net Investment Income Tax.

Is it possible to contribute to both a 401(k) and an IRA in the same year?

Yes, one can contribute to both a 401(k) and IRA in the same year. Yet, the traditional IRA deduction could be disallowed if one participates in a workplace retirement plan and meets certain income threshold criteria.

Is a backdoor Roth IRA legal?

The backdoor Roth IRA is a legal strategy to work around income limitations for high-income earners to make funding Roth IRAs. Essentially, the IRS and Congress recognize the strategy, and it is legal, although execution and reporting are imperative.

How do I know if I qualify for the QBI deduction?

Your qualification depends on your business type and income level. Basically, if you carry pass-through business income with taxable income lower than $197,300 ($394,600 if married filing jointly) in 2025, you would be eligible for the entire 20% deduction.

Tax avoidance versus tax evasion?

Like tax avoidance, tax evading minimizes tax responsibility through illegal means such as hiding income or giving false documents. All strategies discussed here are all legal; hence, they are methods of tax avoidance, not evasion.

About the Author:

This article has been penned by Nitesh Miller, finance expert and founder of Fundaura. Given his experience working with HNIs for more than six years, plus data from top-notch senior managers in finance, he makes sure that every advice has been well researched and is practical. Since 2019, Nitesh led hundreds of high-earning professionals through the implementation of tax strategies that have cumulatively saved millions in taxes: no fluff, just real finance!