Looking for legal ways to reduce tax liability before you’re caught off guard by another big bill in the spring? In this classic Money for Life episode, hosts Eric and Kali break down five financial planning strategies high earners can use to more effectively manage their tax burden.
These 5 money moves are all designed to lower what you owe the IRS. By being proactive and strategic, you can reduce tax ability and avoid unpleasant surprise tax bills next year that are often due to reactive planning and lack of coordination around complex equity compensation packages.
We talk through:
- How to use a securities-backed line of credit against your brokerage or bank account to access cash without triggering capital gains from selling investments
- How to treat your HSA like a stealth IRA for triple tax-free growth
- The financial tradeoffs of relocating to a state with no income tax
- Why tax-loss harvesting is more strategic than the robo-advisor marketing suggests (and where the wash-sale rule trips people up)
- Why high income earners might want to consider using a backdoor Roth IRA conversion to get money into a Roth despite income limits… plus the pro-rata rule mistake that can quietly create a tax bill (and IRS penalties) down the road
This is a rerun of a fan-favorite episode, so as an important note for listeners: some of the figures mentioned are from when this originally aired in 2022. Account limits and specific numbers have been adjusted since then, and some numbers may be different for the 2026 tax year (and beyond).
Other than specific IRS limits, the guidelines here are still valid and the strategies are solid for reducing your tax burden with some proactive planning.
This is a great mid-year listen if you want to make adjustments before you file again next spring.
Key Takeaways: What We’re Thinking About How to Reduce Tax Liability
1. These strategies don’t all work the same way, and not all planning approaches work for all households.
Some lower your taxable income, some lower your tax rate, and some offset or delay taxes on investment gains. Knowing which is which helps you choose the right ones for your situation.
2. Borrowing instead of selling can reduce tax liability
A securities-backed line of credit lets you access cash without selling investments and triggering capital gains. It’s best used as a safety net, not as leverage, and you’ll pay interest on what you borrow.
3. You’ll get more from your money if you treat your HSA like a retirement account.
Pay medical costs out of pocket, invest the HSA balance, and save your receipts to reimburse yourself tax-free later. You’ll need a high-deductible health plan, so seeking out a way to leverage an HSA is usually best only if your medical costs are low and predictable.
4. Moving can help you reduce tax liability… but it’s not necessarily a good strategy unless it actually fits your overall plan.
A state with no income tax can meaningfully cut your bill, but that alone isn’t necessarily reason to move (even when considering retirement). Bear in mind that higher property and sales taxes can eat into the savings, and changes in cost of living can be more meaningful than a change in taxability.
5. Tax-loss harvesting only helps when you have losses to harvest.
Tax-loss harvesting offsets gains elsewhere in your portfolio, but the value varies year to year, and the wash-sale rule can wipe out the benefit if you repurchase too soon.
6. Be careful with backdoor Roth conversions
The backdoor Roth works cleanly only if you have no pre-tax IRA money. If you do, the pro-rata rule makes part of the conversion taxable. This is one of the most common places we see DIY investors make major mistakes, so proceed with caution.
Frequently Asked Questions: Reduce Tax Liability and Avoid More Tax Bill Surprises
What’s the best way for high earners to reduce tax liability?
There’s no single best move. Start by maxing out the tax-advantaged accounts you already have access to, like your 401(k) and HSA. Then layer in strategies like tax-loss harvesting or a backdoor Roth based on your income, portfolio, and plans.
What’s the difference between tax liability and taxable income?
Taxable income is what you’re taxed on. Tax liability is what you actually owe. You can lower your liability by shrinking taxable income (HSA contributions), lowering your rate (moving states), or offsetting gains (tax-loss harvesting).
Does borrowing against my portfolio actually reduce taxes?
It defers them. You avoid capital gains now because you’re not selling. Under current law, if you hold the investments until death, your heirs generally receive a step-up in basis, which can eliminate those gains entirely.
Can anyone open a securities-backed line of credit?
It depends! It might be difficult to access and manage as a DIY, retail investor. It’s more common through advisory and institutional platforms than standard retail brokerages, so availability depends on your custodian and your access.
Do I have to use HSA money in the same year I have a medical expense?
No. You can pay out of pocket, keep the receipt, and reimburse yourself tax-free years later, as long as the expense happened after you opened the HSA. After 65, non-medical withdrawals are taxed like a traditional IRA with no penalty.
Is an HSA really triple tax-free?
At the federal level, yes. California and New Jersey tax HSA contributions at the state level, so the benefit is smaller if you live there.
Will moving to a no-income-tax state automatically lower my taxes?
Not automatically. Your old state may still tax you if you keep strong ties there, and income earned while you lived there, including some equity compensation, can still be taxed by that state after you move. Pensions provided by states may also be taxed by those states, regardless of where you live later.
What is the wash-sale rule?
If you buy the same or a substantially identical investment within 30 days before or after selling it at a loss, you can’t claim the loss. That includes purchases in your IRA.
How does the pro-rata rule affect a backdoor Roth?
The IRS looks at all your traditional, SEP, and SIMPLE IRA balances as of December 31 of the conversion year. If any of that is pre-tax money, a proportional share of your conversion is taxable. Rolling pre-tax IRA money into a 401(k), if your plan allows it, can avoid the problem. Either way, report the conversion on Form 8606.
Ready to create, use, and enjoy money for life? Request a complimentary consultation with us at BYH and discover how to optimize your investments, reduce your tax burden, and grow your wealth: https://beyondyourhammock.com/schedule