Ultimate Tax Strategy: Top 10 Deductions for High Earners

The tax code for high-net-worth individuals (HNWIs) in 2025 is defined by complexity, progressive rate structures, and the critical influence of the recently enacted “One Big Beautiful Bill” (OBBB) Act. Effective tax strategy for HNWIs extends far beyond merely calculating marginal rates; it requires an integrated strategy focused on minimizing Adjusted Gross Income (AGI) and exploiting specialized legislative provisions.

Defining the High-Income Threshold

The term “high-income” is not a static classification but a series of legislative checkpoints designed to increase tax liability progressively. For tax year 2025, the top marginal federal income tax rate of 37% applies to taxable income over $626,350 for single filers and $751,600 for married couples filing jointly .

Crucially, tax strategy is dictated by statutory thresholds that trigger surtaxes, often referred to as “stealth taxes”:

• The 3.8% Net Investment Income Tax (NIIT): This surcharge applies to the lesser of an individual’s net investment income (including capital gains, dividends, and interest) or the amount their Modified Adjusted Gross Income (MAGI) exceeds $200,000 (Single/Head of Household) or $250,000 (Married Filing Jointly) .
• The 0.9% Additional Medicare Tax: This surcharge applies to earned income (wages and self-employment income) above the same $200,000/$250,000 MAGI thresholds .

Since these NIIT and Additional Medicare Tax thresholds are not indexed for inflation, they represent a continuously expanding tax burden on HNWIs . Consequently, the most valuable deductions are those categorized as “above-the-line” adjustments which reduce AGI and MAGI below these critical $200,000/$250,000 cliffs, thereby sheltering both ordinary income and investment income from these surtaxes.¹

The Pivotal Influence of the OBBB Act of 2025

The OBBB Act, signed into law on July 4, 2025 ³, fundamentally recalibrates the power and priority of major tax strategies for high earners. This legislation provided certainty to several key expiring provisions and, in some cases, enhanced their value .

Key changes steering 2025 tax strategy include:

• 100% Bonus Depreciation Reinstated: The Act reversed the scheduled phase-down (which was 60% in 2024) and made 100% bonus depreciation permanent for qualifying property acquired and placed in service after January 19, 2025 . This revitalizes real estate as the premier tax-shelter mechanism.
• The Qualified Business Income (QBI) Deduction (Sec. 199A): The deduction was made permanent, preventing its expiration at the end of 2025 . Starting in 2026, the deduction percentage is proposed to increase from 20% to 23% .
• State and Local Tax (SALT) Deduction Cap: For tax year 2025, the $10,000 cap was increased to $40,000 for married couples filing jointly, although a new AGI phase-out begins at $500,000 MAGI .

The following analysis details the top 10 deductions, prioritizing those that offer the greatest impact and flexibility within this new legislative framework.

Part I: Foundational Tax Mitigation: Maximizing ‘Above-the-Line’ Adjustments to Reduce AGI

“Above-the-line” deductions are subtracted directly from gross income to arrive at Adjusted Gross Income (AGI) . Reducing AGI is the single most important step for HNWIs, as a lower AGI unlocks eligibility for certain credits, lowers the threshold for itemizing, and, most critically, can prevent the triggering of the 3.8% NIIT and 0.9% Additional Medicare Tax .

1. Maximizing Pre-Tax Retirement Contributions (401(k), IRA, SEP/Solo)

Aggressively funding tax-advantaged retirement accounts is the most straightforward method for W-2 earners to reduce AGI .

• W-2 Employee Plans: Contributions to a Traditional 401(k), 403(b), or similar workplace plan are made on a pre-tax basis, automatically reducing AGI . The 2025 employee elective deferral limit is $23,500, with an additional $7,500 catch-up contribution permitted for those aged 50 and older .
• Traditional IRA: The 2025 limit for Traditional IRA contributions is $7,000, plus an additional $1,000 catch-up for those 50 and older.⁶ While high-income earners covered by a workplace plan are often phased out of the deductibility of a Traditional IRA contribution, the underlying mechanism is still vital for the “Backdoor” Roth IRA Strategy. Since there is no income limit on making a non-deductible Traditional IRA contribution, HNWIs can contribute the maximum and immediately convert it to a Roth IRA, bypassing the direct Roth income limits and securing decades of tax-free growth and withdrawal .

2. The Health Savings Account (HSA): The Triple-Tax-Advantaged Tool

The Health Savings Account (HSA), available only to those enrolled in a High Deductible Health Plan (HDHP), is widely considered the most tax-efficient savings vehicle available . Its singular “triple tax advantage” provides an unparalleled reduction in AGI and future tax liability:

1. Deductibility: Contributions are 100% tax-deductible (an “above-the-line” adjustment), directly reducing AGI .
2. Tax-Free Growth: Assets within the HSA can be invested and grow tax-free .
3. Tax-Free Withdrawals: Withdrawals are 100% tax-free, provided they are used for qualified medical expenses .

2025 Contribution Limits:

For tax year 2025, the contribution limits are $4,300 for self-only coverage and $8,550 for family coverage . An additional $1,000 “catch-up” contribution is allowed for individuals aged 55 or older, with married couples needing separate accounts for each catch-up contribution .

The optimal strategy for high earners is to treat the HSA as a “Super-IRA,” paying for current medical expenses out-of-pocket and allowing the HSA funds to compound, tax-free, for decades, for eventual tax-free withdrawal in retirement .

3. Self-Employed Health Insurance Deduction

For HNWIs who own a business (such as sole proprietors, partners, or S corporation shareholders owning more than 2%), the self-employed health insurance deduction provides a powerful, 100% “above-the-line” deduction for premiums paid for health, dental, and qualified long-term care insurance .

The deduction is claimed on Form 7206 and is critical for lowering AGI, even if the taxpayer takes the standard deduction .

Key Limitations to Consider:

• The Eligibility Trap: The deduction is entirely disallowed for any month the self-employed taxpayer, their spouse, or dependents were eligible to participate in a subsidized health plan maintained by an employer .
• Long-Term Care Limits: The deduction for qualified long-term care premiums is capped based on age. For 2025, the deduction ranges from $480 for those 40 and under to $6,020 for those over 70 .
• Self-Employment Tax: This deduction reduces income tax, but cannot be used to reduce net earnings when calculating the 15.3% Self-Employment (Social Security and Medicare) tax .

Part II: Strategic Tax Planning for Business Owners: Leveraging Pass-Through Entity Deductions

HNWIs who generate income through business ownership (as opposed to W-2 wages) have access to uniquely powerful deductions designed for strategic AGI reduction and income sheltering.

4. The Solo 401(k): The Superior Retirement Vehicle for Solopreneurs

For high-income individuals with self-employment income and no full-time employees (other than a spouse), the Solo 401(k) is significantly advantageous over the widely-used SEP IRA . While both plans share a maximum 2025 contribution limit of $70,000 , the structure of the Solo 401(k) allows the deduction to be maximized at a much lower net income level .

The Solo 401(k)’s ability to contribute up to $23,500 as an employee deferral, often using up to 100% of the initial self-employment income, means the business owner can capture a large deduction quickly, making it the most flexible “above-the-line” strategy for business owners .

5. The Qualified Business Income (QBI) Deduction (Section 199A)

The QBI deduction allows owners of pass-through entities (S Corporations, Partnerships, and Sole Proprietorships) to deduct up to 20% of their qualified business income . This deduction is taken regardless of whether the taxpayer itemizes or takes the standard deduction.⁹

The OBBB Act’s Dual Impact:

1. Permanence: The OBBB Act ensured the 20% QBI deduction would not expire after 2025, making it a permanent fixture of business planning .
2. Enhancement (2026): For tax years beginning in 2026 and beyond, the deduction is slated to increase from 20% to 23% .

The HNWI Stacking Strategy:

For HNWIs, the deduction is complex due to phase-out limitations that begin once taxable income (before the QBI deduction) exceeds $197,300 (Single) or $394,600 (Married Filing Jointly) for 2025 .

This is especially restrictive for individuals in a Specified Service Trade or Business (SSTB), such as law, accounting, consulting, or financial services, where the QBI deduction is completely eliminated once taxable income exceeds $247,300 (Single) or $494,600 (MFJ) for 2025.¹¹

Therefore, for high-earning SSTB owners, the immediate priority is to use above-the-line deductions (like the Solo 401(k) and HSA) to reduce their taxable income to fall below the $494,600 cliff. This “deduction stacking” preserves the QBI deduction, which may be worth tens of thousands of dollars, making the initial AGI reductions exponentially more valuable.

Part III: The Wealth Accelerator: Real Estate Tax Shelter Strategies Under the New OBBB Rules

For the highest-income earners, real estate strategies are the most powerful tool for tax mitigation. These deductions rely on creating massive “paper losses” from depreciation to offset high-taxed W-2 or business income, provided the taxpayer navigates the complex Passive Activity Loss (PAL) rules.

6. Accelerated Depreciation: Cost Segregation and 100% Bonus Deduction

This two-part strategy is the engine of high-end real estate tax sheltering:

A. Cost Segregation Study: By default, residential rental property is depreciated straight-line over 27.5 years. A cost segregation study is an engineering-based analysis that reclassifies parts of the building (e.g., carpeting, site improvements, specialized electrical components) from 27.5-year property into short-life assets (5, 7, or 15-year property).¹²

B. 100% Bonus Depreciation Reinstatement: The OBBB Act made this strategy exceptionally potent. The Act permanently reinstated 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025 . This means that the entire cost of the reclassified short-life property identified by the cost segregation study can be immediately expensed in Year 1.¹²

This combination generates massive “paper losses”—often exceeding 20% to 40% of the purchase price—that can be used to dramatically reduce or eliminate a taxpayer’s ordinary income liability.

7. Achieving Real Estate Professional (REP) Status

To utilize the massive paper losses generated by 100% bonus depreciation, the taxpayer must circumvent the Passive Activity Loss (PAL) rules . These rules generally stipulate that losses from rental activities (which are inherently defined as “passive”) can only offset passive income.¹⁵

Qualifying for Real Estate Professional (REP) status, defined under Section 469(c)(7), is the required mechanism . REP status re-characterizes the losses from “passive” to “active,” allowing them to be deducted against high-earning W-2 wages, business income, or capital gains .

To qualify, a taxpayer must meet both of the following stringent tests :

1. The 750-Hour Rule: The taxpayer must perform more than 750 hours of service during the tax year in real property trades or businesses in which they materially participate .
2. The 50% Rule: More than 50% of the taxpayer’s total personal services performed in all trades or businesses during the year must be in real property trades or businesses .

The Strategic “Spouse Test” for W-2 HNWIs:

Since a W-2 professional (like a doctor or executive) working 2,000+ hours per year cannot meet the 50% rule, the dominant strategy for HNWIs filing jointly is for the non-W-2 spouse to qualify as the REP.16 If one spouse qualifies, the passive losses generated by the couple’s real estate portfolio (via the 100% bonus depreciation/cost segregation strategy) are converted to active losses, which can then offset the W-2 spouse’s high ordinary income.16

Added Benefit: Avoiding the 3.8% NIIT: Achieving REP status converts net rental income from “passive” to “active business” income, thereby making it exempt from the 3.8% Net Investment Income Tax (NIIT).¹⁷

Part IV: Investment and Itemized Deduction Optimization for High-Net-Worth Individuals

While strategic use of “above-the-line” deductions is primary, HNWIs typically itemize their deductions because their expenses (taxes, interest, and contributions) exceed the high standard deduction . For 2025, the standard deduction for married couples filing jointly is $31,500 .

8. The State and Local Tax (SALT) Deduction and the $500k Cliff

The deduction for state and local taxes (income, sales, and property taxes) is a critical lever for high earners.²⁰

• The OBBB Cap Increase (2025): The original $10,000 cap was increased to $40,000 for married couples filing jointly for tax year 2025 .
• The New Phase-Out: The key planning constraint is the new AGI phase-out. The $40,000 cap begins to phase down for taxpayers with an AGI above $500,000 (MFJ) .

This phase-out creates a massive incentive for upper-middle HNWIs to use the “above-the-line” AGI reduction strategies (like maxing a Solo 401(k) or HSA) to push their AGI below the $500,000 mark.²² Successfully reducing AGI ensures the taxpayer retains access to the entire $40,000 deduction, a prime example of how deductions stack in value.

9. Strategic Charitable Giving via Donor-Advised Funds (DAF)

Charitable contributions are a primary itemized deduction for HNWIs.²¹ The deduction for cash contributions is generally limited to 60% of AGI, while the deduction for appreciated assets is limited to 30% of AGI .

The “Double Benefit” of Appreciated Stock:

The superior strategy is to donate highly appreciated, long-term held stock or mutual funds directly to a public charity or a Donor-Advised Fund (DAF) . This yields two simultaneous tax benefits:

1. Full Fair Market Value Deduction: The taxpayer receives an itemized deduction for the asset’s full fair market value .
2. Avoidance of Capital Gains: The taxpayer permanently avoids paying capital gains tax (up to 20%) and the 3.8% NIIT on the appreciation .

Bunching with a DAF: To overcome the high $31,500 standard deduction, HNWIs employ “charitable bunching” using a DAF . They front-load several years’ worth of donations (e.g., five years of $20,000 gifts = $100,000) into the DAF in one high-income year. This creates a massive itemized deduction for that year, ensuring they clear the $31,500 standard deduction easily. In the intervening years, they take the standard deduction, while continuing to grant funds from the DAF to charities, maintaining their pattern of giving .

2025 Urgency: New rules beginning in 2026 will cap the value of the deduction at 35 cents on the dollar for high earners and introduce an AGI floor . This creates a clear incentive to execute large, “bunched” DAF contributions of appreciated assets in tax year 2025 to lock in the maximum 37% marginal tax benefit .

10. Investment Tax Optimization: Harvesting Losses and Municipal Bonds

Beyond the standard deductions, advanced investment techniques are used to mitigate capital gains and the 3.8% NIIT.

A. Tax-Loss Harvesting:

This technique involves intentionally selling investments (stocks, bonds, mutual funds) that have fallen in value to realize a capital loss. These losses are then used to offset any capital gains realized during the year . If net losses remain after offsetting all gains, the taxpayer can deduct up to $3,000 per year against ordinary income (W-2, business income), with any excess losses carried forward indefinitely .

The major pitfall is the “Wash Sale Rule,” which prohibits claiming the loss if the taxpayer buys the same or a “substantially identical” security within a 61-day window (30 days before or 30 days after the sale).²³ The strategic solution is immediately repurchasing a similar but non-identical asset (e.g., selling an S&P 500 ETF and buying a Total Stock Market ETF) to maintain market exposure while successfully realizing the tax loss.²⁴

B. Tax-Exempt Municipal Bonds:

Interest earned from most municipal bonds (debt issued by states and local governments) is exempt from federal income tax . For a HNWI in the top bracket, who faces a marginal federal income tax rate of 37% and the 3.8% NIIT, the total effective marginal rate on investment income can be up to 40.8%.25

The benefit is calculated using the Tax-Equivalent Yield (TEY).²⁵ For a 40.8% taxpayer, a municipal bond yielding 3.0% tax-free is mathematically equivalent to a taxable corporate bond yielding 5.07%.²⁵ This avoidance of federal tax (and especially the 3.8% NIIT) makes high-quality municipal bonds a strategic core holding for high-income portfolios .

C. Home Mortgage Interest Deduction:

The home mortgage interest deduction allows taxpayers who itemize to deduct interest paid on “acquisition indebtedness” (mortgages used to buy, build, or substantially improve a primary or secondary residence) .

For debt incurred after December 15, 2017, the deduction is limited to interest paid on a total mortgage principal of $750,000 ($375,000 if married filing separately) . This deduction is often the final component needed to push total itemized deductions over the $31,500 standard deduction hurdle, triggering the greater benefit of itemizing . Furthermore, interest paid on a Home Equity Line of Credit (HELOC) or loan is only deductible if the funds are demonstrably used to buy, build, or substantially improve the home .

Conclusion: Synthesizing the Tax Strategy for 2025

The high-income tax strategy for 2025 is a layered approach, fundamentally reshaped by the OBBB Act. An optimal plan moves beyond simple contribution limits to employ deduction stacking, leveraging the most flexible “above-the-line” adjustments (Solo 401(k), HSA) to reduce AGI. This AGI reduction has the compounded effect of preserving other high-value deductions (like the $40,000 SALT cap and the QBI deduction) from phase-out, a non-linear benefit that drastically increases tax savings. Simultaneously, advanced structures like Real Estate Professional status, combined with the permanently reinstated 100% bonus depreciation, are used to generate large “active” paper losses to offset earned income. Finally, investment strategies focus on avoidance—using tax-exempt bonds, strategically donating appreciated assets, and disciplined tax-loss harvesting—to actively manage the liability associated with capital gains and the 3.8% NIIT. This integrated, multi-pronged strategy is essential for minimizing the effective tax rate for HNWIs in the current legislative climate.