Best Tax Shelters for Affluent Investors –PillarWM
Some people may believe that having a high or ultra-high net worth means you can afford to pay high costs and taxes. As a wealthy person, though, you are well aware that this is certainly not the case. You’re not only in a higher tax bracket, but you’re also conscious that some of your net worth is invested in non-liquid assets that you can’t use to pay your taxes.
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As a result, you’ll be sacrificing your investment returns instead. Many wealth managers recommend the best tax shelters to decrease the impacts of taxes on rich investors’ wealth. If you want to learn more about tax planning, you could request our book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning. For those of you looking to invest $5+ million, this book can provide expert, unbiased insights into your money management.
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If you’re looking to invest between $5 million and $500 million, you’ll want to try and ensure that the profits you make aren’t drained by taxes. A wealth management firm could expertly assist you in managing your money while still keeping tabs on your tax situation. Pillar Wealth Management provides personalized wealth management services to highnetworth individuals in everything from tax planning to retirement planning. You can contact our team for a no-obligation free consultation to learn more about our professional, fiduciary wealth management services.
Table of Contents
How Do Taxes Affect the Wealthy More?
Real estate taxes, sales taxes, property or income taxes, capital gains taxes, and value-added taxes can all consume a significant portion of a person’s income. In fact, the tax rate for high and ultra-high net worth families and individuals is substantially higher, as they have to pay higher taxes, such as the progressive tax. This is because a higher income makes you eligible for a higher tax bracket, which increases your tax burden.
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What Are Tax Shelters and How Do They Work?
You might have heard about how tax shelters help you save money on taxes. This raises the question, “How does a tax shelter work?”
Individuals or companies use a tax shelter to reduce or eliminate their taxable income and, as a result, their tax obligations. Tax shelters are legal, and they can vary from preferential tax treatment for stocks or savings accounts to practices or transactions that reduce taxable income via deductions or credits.
Amounts of funds paid that can be excluded from an individual’s taxable income are known as tax deductions. The reduced taxable income would result in a lower tax bill due to the lower tax rate. Charitable donations, mortgage interest deductions, student loan interest deductions, medical care deductions, and other tax shelters are available in the form of tax deductions. Tax credits minimize the amount of taxes you owe, making them more effective than tax deductions in most cases.
Some of the best tax shelters can also be presented in the form of savings and retirement plans, which protect profits from being taxed. The tax shelter offered by these accounts encourages high-income earners to save enough for their retirement. Wealth managers can use tax-loss harvesting strategies to protect your wealth, as well as performance-boosting strategies to increase your capital growth. You can read more about their strategies to improve portfolio performance in our guide.
Are Tax Shelters and Tax Evasion the Same?
Before we get into “What is an example of a tax shelter?” we need to clarify the difference between tax mitigation or tax avoidance and tax evasion and how tax shelters come into play.
Tax shelters can be used to legally avoid paying taxes, but they could also be used to evade paying taxes. Tax avoidance is a perfectly legitimate way to reduce taxable income and reduce the amount of taxes owed. Tax evasion is the illegal avoidance of taxes via deception or other methods. If you make an investment solely to stop or evade taxation, you might be required to pay extra taxes and penalties.
Tax evasion is described by the IRS as the intentional underpayment or inability to pay taxes. It’s when what others may consider tax avoidance becomes tax evasion. However, it is entirely possible to circumvent taxes without even realizing it. Therefore, it is always better to work with an experienced professional in such matters. If you’re interested in learning about how we help rich investors with their tax planning, you can request our book,7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning – For Families With Liquid Investable Portfolios Between $5 Million and $500 Million.
Examples of the Best Tax Shelters
A wealth manager or tax advisor can successfully identify which tax shelter is adequate for your particular financial situation. In order to understand what is an adequate tax shelter, we need to first ask, “What is an example of a tax shelter?” Here are some of the best tax shelters used by experts to lower their client’s tax liability.
1. Investing in Tax-Efficient Securities
As a wealthy investor, you’re well aware that any transaction or sale you make is taxable, and any commissions you receive through a trading account must be registered and taxed. As a result, actively managed portfolios or funds often result in high taxes and low investment returns.
Investing in tax-advantaged stocks and shares would allow you to earn and keep more money. Similarly, tax-free insurances protect the value of your assets, enabling you to leave the majority of your wealth to your beneficiaries.You can read our 5 Shifts Guide – 5 Critical Shifts for Maximizing Portfolio Growth Strategies if you’re interested in understanding more about the strategies our investment managers use to accelerate your capital growth.
2. Selling Inherited Property
If your ancestors have left you a sizable inheritance in the form of real estate or property, you could consider selling it to avoid estate tax liability and lower your taxable income. While you might feel the urge to hold onto your entitled property, keep in mind that you’ll have to pay more taxes if its value increases. Coupled with the stress and complications that come with inheritance taxes, you might want to re-think whether it’s worth the gains.
That being said, even the process of selling inherited real estate will result in additional taxes, so this is a complex and time-consuming procedure. Working with a specialist will aid you in achieving your goals in a more effective and timely manner. You can contact us to discuss your tax plans or to arrange your first meeting with one of our wealth managers.
3. Making Contributions to Savings Accounts
A health savings account (HSA) is a form of savings account that you can use to pay for medical expenses that aren’t compensated for by your health insurance. You can avail a high-deductible insurance plan, and use funds from your health savings account to reimburse any deductibles.
You will not be taxed on contributions made to a savings account because it is excluded from federal, state, and regional income taxes. By transferring any of your pre-tax earnings into their account, you can reap the benefits of these tax breaks. This will assist in keeping a firmer grasp on your health-care costs while still enabling your HAS investments to grow tax-free.
4. Using Roth IRA Conversions
Tax-free savings accounts collect tax-free funds, and future withdrawals are also tax-free. This implies that you can place your wealth in that account and not pay any taxes on capital gains. One of the best tax shelters is to convert your IRA account to a Roth account. A year after you convert, you won’t need to pay taxes on your savings in that account. This process is not as simple as it sounds, though. Hence, we suggest that you contact one of our wealth managers for a consultation to gain more information on this subject.
5. Relocating to a State with No Income Tax
It isn’t unheard of for affluent investors to own a variety of properties, estates, residences, and businesses throughout the country. However, you could end up with dual residency and dual taxation if you don’t develop a strategy. Certain states can impose taxes on any profit you earn from your ventures even if you’re not a citizen of that state.
Several high-tax states charge rich families with the highest tax rate, which includes investment income tax, federal tax revenue, real estate tax, and more. You could consider relocating to a state with no income tax after you retire to save extra income.
6. Donating Generously to Foundations
Donating to charitable organizations or foundations is one of the best tax shelters for rich investors. As several affluent investors have philanthropic goals in their financial plans, this approach helps you achieve more than one objective.
The capital benefit from charitable contributions, whether in the form of cash or stock, is already exempt from high taxes. If you submit a receipt, you can even deduct your tax return, thereby reducing your taxable income. Donating valuable assets, such as real estate or bonds, is a sensible move. You won’t need to pay taxes on the gains because you’ll be able to subtract 30% of your gross income as a deduction.
7. Purchasing Municipal Bonds
One of the most commonly used tax shelters is to invest in municipal bonds. They allow you to tax-free income and compound profits if your money is re-invested. They’re fixed-income assets that can provide better after-tax returns than taxable government and corporate bonds. Municipal bond interest is usually exempt from federal taxes and, on certain occasions, state and local taxes as well.
So, how do these help you if you’re eligible for a high tax bracket? Let’s take a look at one example.If your personal income tax rate is 24%, a municipal bond with a 6% interest rate is a safer bet than a taxable bond with a 7.9% interest rate. Hence, you end up saving more money.
Most of these tax shelters should be handled by a financial advisor to help you successfully prepare for your future. Wealth management needs the expertise of a professional for investors who have more than 5 million dollars to invest. You can request our book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning – For Families With Liquid Investable Portfolios Between $5 Million and $500 Million, to learn more about some of the techniques we use at Pillar Wealth Management.
Final Words
Now that you have an idea of what is an adequate tax shelter, you can appreciate the complexities and intricacies that are involved in tax mitigation. Although this isn’t an extensive compilation of the best tax shelters, these are amongst the more effective means of reducing your tax liability. For a more personalized tax avoidance approach, you should consult a professional, such as a wealth manager.
Our financial advisers at Pillar Wealth Management have vast experience providing clients with tax avoidance techniques that are tailored to their specific financial circumstances. We are an independent firm and work on a fee-only basis, ensuring that any and all costs are pre-disclosed to you during your initial consultations. We can help you with implementing the best tax shelters if you’re looking to invest between $5 million and $500 million in liquid assets. To learn more about how you can achieve financial serenity, you can schedule your first meeting with one of our insightful, professional, and accomplished wealth managers.
To be 100% transparent, we published this page to help filter through the mass influx of prospects, who come to us through our website and referrals, to gain only a handful of the right types of new clients who wish to engage us.
We enjoy working with high net worth and ultra-high net worth investors and families who want what we call financial serenity – the feeling that comes when you know your finances and the lifestyle you desire have been secured for life, and that you don’t have to do any of the work to manage and maintain it because you hired a trusted advisor to take care of everything.
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