Personal Finance

I'm in my mid-40s with an annual income of $3 million and my tax bill is making me sick to my stomach

Maurie Backman

Published: January 15, 2025 11:48 am

Key Points from 24/7 Wall St.

• There are numerous ways you can reduce taxable income.
• Max out retirement plans like 401(k)s or IRAs, and be careful when taking investment gains.
• Consult with a tax professional for customized advice.
• Retiring early is possible, and may be easier than you think. Click here now to see if you’re ahead, or behind. ^(Sponsor)

No matter how much money you earn, you’re going to have to come to terms with losing a portion to taxes. The question is, how much?

In a recent Reddit post, one high earner is frustrated by the amount of tax they pay. They own a business that generates $3 million a year, and their annual tax bill is about $1.2 million.

Of course, it’s not unusual for higher earners to have high tax burdens. And given the complexity of this person’s situation — their high income, the fact that they own a business, and the nature of that business (pass-through through K1s) — I’d say they definitely need a good tax professional in their corner. But there are also everyday steps you can take to lower your tax burden if you feel you’re overpaying the IRS.

Ways to pay the IRS less

No matter how much money you earn, it’s natural to want to keep the maximum amount out of the hands of the IRS. That’s where strategic tax-planning comes in.

One thing I’d tell anyone to do in this regard is aim to max out a retirement plan like an IRA or 401(k). If you fund a traditional IRA or 401(k), your contribution exempts a portion of your income from taxes. If you contribute to a Roth IRA or 401(k), you won’t get an immediate tax break on your money, but you’ll enjoy tax-free gains in your account and tax-free withdrawals. So either way, you’re looking at some amount of tax benefit at some point.

Another thing to do is be careful with capital gains. The stock market is coming off a solid year, and depending on your financial situation, it could be a good time to cash out some of your gains. But aim to cash out long-term gains only, as they’ll be taxed more favorably than short-term gains, which apply to investments held for one year or less.

Of course, it’s also a good idea to familiarize yourself with tax deductions you may be eligible for, like mortgage interest. And if you’re self-employed, there are likely a good number of expenses you can write off if they relate to doing your job.

Getting help is best

You don’t need to own a business and have a $3 million income to benefit from working with a tax professional. A lot of people hire accountants to file their tax returns. But what I suggest doing is paying an accounting or tax professional for a comprehensive financial review. They can take a look at your total picture and recommend strategies for minimizing your tax burden.

And to be clear, this isn’t a move that’s reserved for the wealthy. If you’re an average earner but want help minimizing your IRS bill, a $500 or $1,000 investment in consulting a tax professional could translate into thousands of dollars in tax savings year after year. So unless you’re stoked about the idea of reading through the U.S. tax code and identifying loopholes you’re eligible for yourself, I’d highly recommend working with a professional whose job it is to know all of that stuff already.