How to Legally Reduce Your Taxes When You Earn Over $1 Million

Earning over $1 million per year puts you at the highest marginal federal rate (37%), subjects investment income to the 3.8% Net Investment Income Tax, and phases out most deductions. It also gives you access to the most powerful planning tools in the tax code — if your advisor is actively using them.

The strategies below are not exotic. They are statutory deductions and exclusions that Congress specifically created. The difference between using them and not is the difference between reactive and proactive planning.

The Five Highest-Impact Strategies for Seven-Figure Earners

1. Defined Benefit / Cash Balance Plan — $200,000+ Annual Deduction

A 401(k) caps contributions at $24,500. For someone earning $1 million, that deduction is noise. A properly designed defined benefit or cash balance plan allows annual contributions — and immediate deductions — of $200,000 to $330,000+ per year. At 37%, a $250,000 contribution means $92,500 less in federal tax every single year.

2. Cost Segregation — First-Year Deductions of $100K–$300K+

Commercial real estate is depreciated over 39 years by default — roughly $51,000 per year on a $2 million building. A cost segregation study reclassifies components to 5-, 7-, and 15-year lives, all eligible for 100% bonus depreciation in Year 1. The same $2 million building can generate a $200,000–$400,000 first-year deduction instead.

3. Real Estate Professional Election — $70K–$111K+ Per Year

For households where one spouse spends 750+ hours per year in real estate activities (more than any other profession), all real estate losses become non-passive — directly offsetting W-2 income, business income, partnership distributions. A household with $300,000 of real estate depreciation saves $111,000 per year in federal taxes when this election is properly maintained.

4. S Corporation QBI Optimization

The permanent 20% QBI deduction for qualifying pass-through income is available to business owners regardless of income level (for non-SSTB businesses). On $800,000 of qualifying income, that is a $160,000 deduction — $59,200 of annual tax savings. Proper S corporation structure also reduces self-employment and Medicare surtax exposure.

5. Pre-Year-End Tax Modeling

All of the above strategies exist whether or not your advisor is using them. The discipline that activates them is an annual Q4 planning process that models projected liability, identifies what can still be done before December 31, and executes. Most high earners discover their tax bill in April. Proactive clients know it in October — and have 90 days to act.