Mark Twain famously remarked, “The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin.” His humorous observation highlights a reality in California: it has one of the highest income tax rates in the country.

However, this doesn’t mean you have to accept paying the highest possible taxes. There are strategies for you as a high earner to reduce your tax burdens.

At Bulman Wealth Group, we have decades of experience in providing wealth management services in Northern and Southern California for high-net-worth individuals and families.  

This article will explore a range of tax-saving techniques that may potentially help you stop losing money through high taxes.

Understanding the California and Federal Tax Landscape

California’s progressive income tax rates rise with income, making it essential to know your tax bracket for planning. Here’s an overview of the key California tax brackets:

• 10.3% on income between $312,687 and $375,221
• 11.3% on income between $375,222 and $625,369
• 13.3% on income over $1 million

In comparison, federal tax rates have been lower due to the Tax Cuts and Jobs Act of 2017, which reduced the top rate from 39.6% to 37%. Here are federal tax brackets for high earners for 2024:

• 32% on income between $182,101 and $231,250 (single) / $364,201 and $462,500 (married filing jointly)
• 35% on income between $231,251 and $578,125 (single) / $462,501 and $693,750 (married filing jointly)
• 37% on income over $578,125 (single) / $693,750 (married filing jointly)

When combining federal and state taxes, the overall tax burden for high earners in California can exceed 50% of their income. This underscores the importance of seeking tax-saving solutions.

Tax-Saving Strategies for High Earners

Let’s consider strategies to help you keep more of your hard-earned income.

Tax-Advantaged Retirement Savings

Roth IRAs have been around for a while, but with tax benefits from the 2017 Tax Cuts and Jobs Act expiring in 2025, Roth strategies are back in the spotlight.

Roth IRA conversion: Converting a Traditional IRA to a Roth IRA has no income limits, allowing high earners to take advantage of this strategy. While you pay taxes on the converted amount now, future withdrawals are tax-free.

Backdoor Roth IRAs: For high earners who can’t directly contribute to a Roth IRA due to income limits, a backdoor Roth IRA is a valuable strategy. This involves contributing to a Traditional IRA and then converting those funds to a Roth IRA. When using a backdoor Roth IRA, be mindful of the pro-rata rule, as it can impact the taxation of the conversion if you have other pre-tax IRA assets.

Maximizing Retirement Plans

In 2024, the contribution limit for employer-sponsored plans like 401(k)s and 403(b)s is $22,500. Individuals over 50 can add catch-up contributions of $7,500, totaling $30,000. These plans offer benefits like pre-tax contributions that lower taxable income and enable tax-deferred growth.

Self-employed retirement plans include the SEP IRA, allowing pre-tax contributions up to 25% of compensation or $66,000 for 2024. The Solo 401(k) combines employee and employer contributions, with a maximum of $66,000, plus a $7,500 catch-up for those over 50.

Stock Options and Restricted Stock Units (RSUs)

Stock options and RSUs are common forms of compensation for high earners in California, particularly within the tech industry. Here’s a quick breakdown:

Stock options: Grant the right to purchase company stock at a predetermined price. Exercising triggers a taxable event, typically resulting in capital gains tax or ordinary income tax.

Restricted stock units (RSUs): Shares that vest over time, with the fair market value considered taxable income upon vesting.

Strategies for Managing Taxes on Stock Options and RSUs

Timing of exercises and sales:

• Exercise timing: Consider exercising stock options in a year when your overall income is lower to reduce the tax impact.
• Sale timing: Holding shares for more than one year after exercising options can qualify them for long-term capital gains tax rates, which are typically lower than ordinary income tax rates.

Early exercise of Incentive Stock Options (ISOs):

• If your company allows it, early exercising ISOs can minimize the impact of alternative minimum tax (AMT) by starting the holding period early.

Section 83(b) Election (for Restricted Stock Awards Only):

• Shareholders of restricted stock can report the fair market value of their shares as ordinary income at the time of grant instead of at vesting. This can reduce taxes since the stock price is usually lower at the grant time. This strategy is especially beneficial for long vesting periods.

Managing taxes on stock options and RSUs can be complex. Consult an experienced financial advisor in California like those with Bulman Wealth and a tax advisor.

Additional Considerations for California High Earners

Health Savings Accounts: HSAs provide triple retirement tax benefits in California: contributions are tax-deductible, earnings grow tax-free, and withdrawals for medical expenses are tax-free. HSAs can also serve as a retirement savings option, as invested funds aren’t subject to RMDs at age 73.

Tax-loss harvesting and investment placement: Tax-loss harvesting means selling investments at a loss to offset gains and reduce taxable income. Strategically placing investments in taxable and tax-advantaged accounts can also optimize your tax situation.

Charitable giving: Donor-advised funds (DAFs) offer flexibility and immediate tax deductions. Donating appreciated securities avoids capital gains taxes and maximizes deductions. Qualified Charitable Distributions (QCDs) reduce taxable income and fulfill RMD requirements for those over 70½. Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs) provide income streams and significant future gifts while reducing estate and gift taxes.

Partner With Bulman Wealth Group

Tax laws are intricate and constantly evolving. Our team of financial advisors with a fiduciary duty are dedicated to helping you navigate the complexities of California’s tax landscape and find ways to help maximize your after-tax income.

Our wealth management services with offices in Roseville and Temecula focus on five key areas: taxes, investments, income, healthcare, and legacy planning.

Contact us today to schedule a consultation and learn how we can create a personalized plan to seek to enhance your financial confidence in California.