Comprehensive Guide
Tax Planning Strategies for High-Income Individuals
Tax planning for high-income individuals means proactively coordinating investment decisions, retirement strategies, charitable giving, and business structures to seek to reduce unnecessary tax exposure across multiple years. At New Horizons Boutique Financial Services, Lars Engman (MBA) and Alec Engman (B.S. Economics, University of Minnesota) integrate tax optimization into every client's comprehensive financial strategy. This guide outlines nine core strategies, 2026 IRS contribution limits, and the Minnesota-specific considerations that national firms often overlook.
The Stakes Are High
Why High Earners in Minnesota Face a Different Tax Challenge
High income triggers a layering effect that goes well beyond the standard rate tables. As taxable income rises, earners may encounter the 37% federal marginal rate, the 3.8% Net Investment Income Tax (NIIT) on investment income above $200,000 for single filers or $250,000 for married filers, and a 0.9% Medicare surtax on earned income above those same thresholds. Itemized deduction phaseouts and Alternative Minimum Tax (AMT) exposure can further complicate the picture.
Minnesota adds another layer that national financial planning guides frequently ignore. The state's top marginal rate of 9.85% applies to taxable income above approximately $220,650 for single filers in 2026, according to the Minnesota Department of Revenue. For the highest earners in the Twin Cities metro, combined marginal rates on ordinary income may exceed 46%. That gap between a thoughtful strategy and no strategy is substantial. It is also precisely why tax optimization planning must be coordinated with investments and retirement income rather than treated as a standalone exercise.
2026 Key Tax Thresholds at a Glance
Source: IRS, Minnesota Department of Revenue. Figures are approximate and subject to change. Consult a qualified tax professional for your specific situation.
Nine Core Approaches
What Tax Strategies Do High Earners Actually Use?
The following strategies are commonly employed as part of a coordinated tax optimization plan. Each involves trade-offs and may or may not be appropriate depending on individual circumstances. These are educational descriptions, not personalized recommendations.
Maximize Pre-Tax Retirement Contributions
Contributing the maximum to a 401(k) or 403(b) reduces current taxable income dollar-for-dollar. For 2026, the IRS employee contribution limit is $24,500. Individuals age 50 and older may contribute an additional $7,500 catch-up amount, for a combined total of $32,000. Those aged 60 to 63 may be eligible for an enhanced catch-up contribution of $11,250 under SECURE 2.0 rules. Note that pre-tax deferrals create future tax obligations when distributions are taken in retirement; the benefit depends on whether your tax rate is lower in retirement than it is today.
Roth Conversion Planning
A Roth conversion moves pre-tax retirement assets into a Roth IRA, triggering income tax in the conversion year but seeking to create tax-free growth and distributions thereafter. Strategic conversions are often executed during years of lower income, partial retirement, or market downturns. Multi-year conversion ladders may help avoid bracket spikes and reduce future Required Minimum Distributions (RMDs). Conversions can also affect IRMAA Medicare premium surcharges and should be modeled carefully before execution. This strategy may not be suitable for everyone, and results depend on individual tax circumstances.
Tax-Loss Harvesting
Tax-loss harvesting involves selling investments that have declined in value to realize losses that offset capital gains, potentially reducing taxable income by up to $3,000 per year against ordinary income (with excess carried forward). This strategy requires careful attention to wash-sale rules, which disallow a loss deduction if a substantially identical security is repurchased within 30 days before or after the sale. While tax-loss harvesting can improve after-tax returns in certain market environments, it does not eliminate investment risk and involves transaction costs.
HSA Maximization
Health Savings Accounts offer a rare triple tax advantage: contributions are pre-tax or tax-deductible, growth is tax-deferred, and qualified withdrawals are tax-free. For 2026, the HSA contribution limit is $4,300 for individuals and $8,550 for families, with an additional $1,000 catch-up for those age 55 and older. High earners enrolled in eligible high-deductible health plans can invest unused HSA funds for long-term tax-free growth, effectively creating a supplemental retirement account. Eligibility requires enrollment in a qualifying high-deductible health plan, and non-qualified withdrawals before age 65 are subject to income tax plus a 20% penalty.
Charitable Giving Strategies
For high earners with philanthropic goals, a donor-advised fund (DAF) allows a large charitable contribution in a high-income year, generating an immediate deduction, while grants to specific charities can be made over time. Donating appreciated securities directly to a DAF or charity avoids recognizing the embedded capital gain while the full fair market value qualifies as a deduction, subject to AGI limitations. Bunching multiple years of charitable gifts into a single year may allow itemized deductions to exceed the standard deduction threshold in that year. Qualified Charitable Distributions (QCDs) from IRAs, available to those age 70.5 or older, allow up to $105,000 annually (as indexed for 2026) to transfer directly to charity without passing through taxable income.
Deferred Compensation Plans
Some employers offer nonqualified deferred compensation (NQDC) plans that allow highly compensated executives to defer a portion of current salary or bonus into future tax years, potentially when income and tax rates are lower. Unlike 401(k)s, NQDC plans have no IRS contribution limits, making them a powerful tool for high earners. However, NQDC balances are unsecured obligations of the employer and carry counterparty risk; if the employer becomes insolvent, deferred amounts may be lost. Distribution timing elections must typically be made well in advance and are subject to strict IRS rules under Section 409A.
Business Income Optimization
Business owners may have significant flexibility in how income is structured and when it is recognized. S-Corporation elections can allow owners to manage the split between W-2 salary and pass-through distributions, potentially reducing self-employment taxes. The Section 199A Qualified Business Income (QBI) deduction may allow eligible business owners to deduct up to 20% of qualified business income, subject to income thresholds and service business limitations. Defined benefit or cash balance pension plans can allow contributions far exceeding 401(k) limits for older business owners. Each structure involves ongoing compliance obligations and should be reviewed with a qualified advisor and CPA.
Asset Location Strategy
Asset location refers to the deliberate placement of investments across account types based on their tax characteristics. Tax-inefficient assets, such as bond funds or actively managed equity funds generating short-term gains, may be better held inside tax-deferred accounts like 401(k)s or IRAs. Tax-efficient assets, such as broad index funds or municipal bonds, may be more appropriate for taxable brokerage accounts. A thoughtful asset location approach seeks to minimize the annual tax drag across a portfolio, though the benefit varies based on account sizes, time horizon, and investment mix.
Estate and Gift Planning Integration
For high-net-worth individuals, coordinating income tax planning with estate planning may create meaningful long-term savings. Annual gift exclusions allow up to $19,000 per recipient in 2026 (per IRS guidelines) without gift tax consequences. Irrevocable trusts, such as GRATs or SLATs, can transfer appreciation out of a taxable estate under current exemption levels, which are subject to legislative changes after 2025. Stepped-up basis rules at death remain a critical consideration for asset holding periods and inheritance planning. Estate planning strategies carry complexity and should involve legal counsel alongside financial guidance.
The Minnesota Difference
How Does Minnesota's Tax Environment Affect High Earners?
Minnesota operates one of the most progressive individual income tax systems in the United States, with four brackets ranging from 5.35% to 9.85% as of 2026. For high earners in the Twin Cities metro, the eastern suburbs, and communities across the state, this creates a compounding effect with federal taxes that makes proactive planning especially important.
One meaningful distinction for those nearing retirement: Minnesota does not tax Social Security benefits. This is notably different from the federal treatment, where up to 85% of Social Security income may be taxable. For executives and professionals transitioning from a high-income career into retirement, this exemption changes how income should be sequenced and which accounts to draw from first, particularly when evaluating Roth conversions and deferred income timing.
Minnesota also conforms closely to federal tax law in many respects, including the treatment of capital gains. Long-term capital gains are taxed as ordinary income at the state level, meaning Minnesota high earners do not benefit from the preferential federal long-term capital gains rates at the state level. This makes tax-loss harvesting, asset location, and charitable giving strategies particularly valuable in reducing Minnesota taxable income.
Minnesota vs. Federal: Key Differences
| Tax Item | Federal | Minnesota |
|---|---|---|
| Top Rate | 37% | 9.85% |
| Social Security Tax | Up to 85% taxable | Not taxed |
| Long-Term Capital Gains | 0%, 15%, or 20% | Ordinary income rates |
| Estate Tax | Federal exemption applies | Separate MN estate tax |
For illustrative purposes. Consult a qualified tax professional for current rates and applicability to your situation.
Minnesota Estate Tax Note
Minnesota has its own estate tax separate from the federal estate tax, with an exemption of approximately $3 million per person as of 2026 per Minnesota Department of Revenue guidance. This is significantly lower than the federal exemption, meaning some Minnesota estates may owe state estate tax without triggering federal liability. This distinction makes Minnesota-specific estate planning an important layer of strategy for high-net-worth individuals.
Avoid These Pitfalls
Common Tax Planning Mistakes High Earners Make
Treating Tax Planning as a Year-End Event
Effective tax strategy requires year-round attention, particularly for those with variable income, stock options, or business distributions. Waiting until November or December to evaluate exposure often forecloses the most impactful options.
Ignoring IRMAA and Medicare Surcharges
Income-Related Monthly Adjustment Amounts (IRMAA) increase Medicare Part B and D premiums for higher-income beneficiaries based on income from two years prior. A Roth conversion or large capital gain in a single year can create unexpected premium increases. Planning around IRMAA thresholds is particularly relevant for those nearing or in retirement.
Overlooking State Tax Coordination
Federal optimization alone leaves significant opportunity on the table in Minnesota. State-specific considerations, including the treatment of capital gains as ordinary income and the separate Minnesota estate tax, require dedicated attention beyond federal planning.
Planning in Silos
Tax planning that is disconnected from investment management, retirement income planning, and estate strategy often produces suboptimal or contradictory outcomes. A Roth conversion that reduces RMDs must also be evaluated for its effect on Medicare premiums, estate values, and investment account balances. Coordination matters.
Our Approach
What Is Tax Optimization Planning, and How Does It Work at New Horizons?
Tax optimization planning is a forward-looking, multi-year approach to managing tax exposure across every dimension of a financial plan. It is distinct from tax preparation, which focuses on accurately reporting what has already happened. Tax optimization asks what can be done in advance, across investments, retirement accounts, business structures, and charitable giving, to seek to reduce the total tax paid over time.
At New Horizons Boutique Financial Services, Lars Engman (MBA) and Alec Engman (B.S. Economics, University of Minnesota) take a strategy-before-products approach. That means every tax planning discussion begins with a complete analysis of a client's current situation before any specific action is recommended. Our FINRA Series 65 and Series 66 registrations allow us to coordinate tax strategy directly with investment and retirement planning rather than treating them as separate conversations.
We intentionally limit our client count. That is not a constraint; it is a design choice. It means that each client receives our full attention, including the kind of detailed, multi-year tax modeling that makes the difference between reactive tax filing and proactive strategy. Results vary by individual circumstances, and we do not provide tax preparation services directly, but we coordinate closely with CPAs and tax professionals as part of an integrated planning relationship.
Comprehensive Tax Situation Review
We begin by understanding your full income picture: W-2 wages, business income, investment distributions, deferred compensation, and expected changes in each over the next 5 to 10 years.
Multi-Year Tax Projection Modeling
We model future tax scenarios to identify potential bracket management opportunities, Roth conversion windows, and the timing of large income events such as business sales or retirement transitions.
Integrated Strategy Across All Accounts
Tax planning is coordinated with your investment portfolio, retirement income plan, and estate strategy so that each decision supports the others rather than creating unintended consequences.
Ongoing Monitoring and Adjustment
Tax law changes, income fluctuations, and life events all affect the optimal strategy. We review tax positioning as part of quarterly planning reviews, adjusting as circumstances evolve.
Frequently Asked Questions
Common Questions About Tax Planning for High-Income Individuals
What tax strategies do high earners use?
High earners commonly use a combination of strategies including maximizing pre-tax retirement contributions, Roth conversions during lower-income years, tax-loss harvesting, charitable giving through donor-advised funds, HSA maximization, deferred compensation plans, business income optimization, and estate planning techniques. Each strategy involves trade-offs and may or may not be appropriate depending on an individual's income, filing status, goals, and overall financial situation. No single approach works universally.
How do I reduce taxes on high income?
Reducing taxes on high income typically requires a coordinated, multi-year approach rather than a single action. Common starting points include fully funding pre-tax accounts, evaluating whether a Roth conversion makes sense given projected future income, using tax-loss harvesting to offset gains, and exploring charitable strategies if philanthropy is a goal. Minnesota residents should factor in the 9.85% state income tax rate and the absence of a state tax on Social Security benefits when planning retirement income sequencing. A financial advisor and CPA working in coordination are well-positioned to evaluate these options in the context of your complete financial picture.
What is tax optimization planning?
Tax optimization planning is a forward-looking, coordinated approach to managing tax exposure across investments, retirement accounts, estate planning, and business structures over multiple years. It is distinct from tax preparation, which focuses on filing returns for past income. The goal of tax optimization is to seek to reduce the total tax paid over a lifetime, not just in the current year. At New Horizons Boutique Financial Services, tax optimization is integrated into comprehensive financial planning so that investment decisions, retirement income sequencing, and estate strategy are all tax-aware.
Do high-income earners in Minnesota pay more in taxes than in other states?
Yes. Minnesota's top marginal income tax rate of 9.85% is among the highest in the country. When combined with the federal top rate of 37%, high earners in Minnesota may face combined marginal rates exceeding 46% on ordinary income, depending on their specific situation. This makes proactive tax planning particularly valuable for Minnesota residents. One notable offset is that Minnesota does not tax Social Security benefits, which can be a meaningful advantage for those in or approaching retirement compared to states that partially or fully tax Social Security income.
What are the 401(k) contribution limits for 2026?
For 2026, the IRS sets the employee 401(k) contribution limit at $24,500. Individuals age 50 and older may contribute an additional $7,500 catch-up contribution, for a combined total of $32,000. Under SECURE 2.0 provisions, those aged 60 to 63 may make an enhanced catch-up contribution of $11,250 rather than the standard $7,500. These limits apply to both traditional and Roth 401(k) contributions. The total limit across all sources (employee plus employer) is $71,000 for 2026, subject to compensation limits.
When does a Roth conversion make sense for a high-income individual?
A Roth conversion may make sense during years when taxable income is temporarily lower than usual, such as during a gap year between leaving employment and starting retirement distributions, following a market decline that reduces account values, or before required minimum distributions (RMDs) begin. Conversions are also evaluated as part of a multi-year strategy designed to reduce future RMDs and create tax-free assets for heirs. However, conversions add to taxable income in the year executed and may trigger IRMAA surcharges, increase the taxation of Social Security benefits, or push income into a higher bracket. Individual analysis is essential before executing a conversion.
Take the Next Step
Ready to Build a Tax Strategy That Fits Your Complete Financial Picture?
Tax planning that works for high-income individuals requires more than maximizing contributions or harvesting losses at year-end. It requires a coordinated strategy across your investments, retirement accounts, business interests, and estate plan. Lars Engman and Alec Engman at New Horizons Boutique Financial Services work with executives, professionals, and business owners across Minnesota who want a thoughtful, integrated approach built specifically around their goals.
We intentionally serve a limited number of clients to ensure each relationship receives the attention it deserves. The first conversation is low-pressure and carries no obligation. It is simply a chance to understand your situation and explore whether our approach is the right fit.
Strategy Before Products
Every recommendation begins with a clear financial strategy. No product is suggested until the plan is built.
Boutique by Design
We intentionally limit client count so every relationship receives full time and attention from your advisor.
Coordinated Tax Planning
Tax optimization is integrated with investments, retirement income, and estate planning, not treated separately.
Ongoing Partnership
Quarterly reviews and proactive outreach mean your strategy evolves as tax law, income, and goals change.