When your income exceeds a certain limit, you are subject to high taxes, which can go up to rates of 50+% of your total income. Often, this can cause a great dent in your finances, especially if most of your wealth is tied up in non-liquid assets. That is why many financial advisors specialize in developing and implementing tax strategies for high income earners and which is why we highly recommend you request your free copy of this book about investment management, estate, tax and financial planning, specifically written for those looking to invest between $5 million and $500 million.
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However, the use of these strategies is dependent on your personal circumstances, which is why you need to work with someone who is equipped to ascertain your requirements as an individual with over 10 million dollars in liquid investable assets. Our Ultimate Guide offers investors like yourself expert guidance on choosing the best financial advisor or wealth manager for your unique financial situation
Private wealth management firms like ours work exclusively with wealthy clients who have a high, very-high, or ultra-high net worth. Therefore, we have the knowledge, the experience, and the expertise of using tax strategies for high income earners. Clients with 5 million to 500 million dollars in investable assets are eligible to work with our team at Pillar Wealth Management. We can help you create a comprehensive plan which covers a multitude of financial aspects that affluent families are most concerned with, from retirement planning and estate planning to tax mitigation and wealth enhancement. If you would like us to help you draft a personalized financial plan, feel free to book a meeting with our wealth managers today.
In this article, we will discuss some of the smart tax-saving strategies that high net worth and ultra-high net worth individuals and families use to manage their taxes. We will also answer questions such as, “How do high-income earners reduce taxes?”“What income levels pay the most taxes?”and “Why are billionaires not taxed?”
Why Do Wealthy Investors Have to Pay Higher Taxes?
The progressive tax system makes sure that taxpayers are charged taxes according to their taxable income. So, if you’re wondering, “What income levels pay the most taxes?” the answer is that the higher your income level, the more tax burden you have as you enter a higher tax bracket.
Hence, knowing your taxable income can help you determine how much you owe in taxes. The taxable income can be calculated by subtracting IRS-permitted line deductions from your adjusted gross income. The resulting value will help you identify the federal tax bracket that you come under.
As a wealthy investor, you need to be aware of the types of taxes that can apply to you. Federal or state income taxes are progressive taxes, and capital gains taxes apply on any high-value item or asset that you sell, among others. Losing your profits to a heft tax bill is counterintuitive to any income-generating activity you invest in. If you want to learn more about how rich families safeguard their assets, you can refer to our hard-cover book, 7 Secrets To High Net Worth Investment Management,Estate, Tax and Financial Planning – Strategies for Families Worth $25 Million To $500 Million.. It offers insights that help wealthy people live a financially secure life.
Just as investors use strategies to improve their portfolio performance and optimize their investments, tax advisors can use strategies to bring down your taxes. If you’re curious about the portfolio optimization strategies we use at Pillar Wealth Management, you can refer to our Performance Guide for a more detailed overview. If you’re interested in learning about tax saving or tax reduction strategies, keep reading.
Frequently Used Tax Strategies for High Income Earners
In this section, we will give answers to the question, “How do high-income earners reduce taxes?” We’ll discuss tax strategies that are effective for individuals with a net worth of millions of dollars. However, you should keep in mind that in order to implement the best strategies for your profile, you need an expert’s touch. That is why we suggest that you read our Ultimate Guide for the best tips to find the right financial advisor for you.
Family Income Splitting and Family Trusts
This is one of the most basic tax strategies for high income earnersthat you can take advantage of. It works by setting up a prescribed rate loan. When you invest in an RRSP, the amount of your contribution is deducted from your taxable income, thereby reducing your tax bill. Attribution rules can make this process a little complicated, but you can avoid that by making use of a properly structured family trust or transferring your contributions directly to your family members through a formal loan agreement. If you have more questions about how this works, you can call us up to consult with our experts!
Family trusts can help shift your investment income to your family members without being affected by a high marginal tax rate if structured properly, that is. These trusts can help you provide annual tax-free income to your family to pay for their various expenses.
Another strategy you can use to provide for your slow-income spouse is by establishing a spousal loan. This will shift your investment income and capital gains to them, which will be taxed at your spouse’s lower marginal tax rate.
Invest in Tax-Free Savings Accounts (TFSA)
Any contributions made to tax-free savings accounts grow tax-free, and there is no tax incurred on future withdrawals. This means you can invest your money in that account and any investment income you generate will not be taxed. A few examples of these kinds of accounts are a Roth IRA and Health Savings Accounts, which we will discuss in more detail.
Health Savings Account (HSA)
A health savings account (HSA) is part of your retirement plan since it covers your medical bills and expenses, which your health insurance doesn’t cover. For instance, visits to dentists, eye doctors, and other medical appointments. You can opt for a high-deductible health insurance plan so that you’re able to use the money in your health savings account for co-pays and deductibles.
So, how does this help with your taxes? The money you put in your health savings account is exempt from federal income taxes, state or local taxes, and FICA taxes, and you won’t be taxed for withdrawing any money for your medical bills.
Wealthy investors can capitalize on these tax benefits by adding portions of their pre-tax income to their account. This will allow you to effectively manage your health costs and allow your contributions in your HAS to grow without being taxed.
Retirement Savings Accounts
Investors with a 401(k) account or an IRA (individual retirement account) can make more contributions to these accounts to reduce their taxable income and tax burden. Moreover, your balance can keep increasing with deferred taxes, similar to a health savings account.
Any investments income or capital gains you generate through your retirement account will not be taxed until you withdraw it in the future. The tax rate upon withdrawal depends on whether you withdraw your savings before or after your retirement age or at a pre-determined time.
Invest in Your Children’s Education
If you want to capitalize on tax-deferred growth and government grants, you can contribute your income to a registered education savings account. Your balance can grow tax-free, and when you withdraw any money from the account, the income is taxed at a lower rate.
Choosing Tax-Efficient Investments
Investing in tax-efficient securities and assets can help you generate more profits and keep them. If you’re interested in learning about other strategies that our wealth managers use to increase your capital growth, our guide talks about 5 shifts that you should be making to your portfolio.
A few examples of these type of investments include flow-through shares and life insurances. A flow-through works by investing in resource-based companies, i.e., companies involved in the explorations and development of oil, gas, renewable energy, mining, and more. With the right structure, these companies can ‘renounce’ the expenses it incurs to you, which you can then deduct on your tax return, up to the amount of the investment you made. This reduces your overall net income.
Life insurances are tax-exempted, which makes them an advantageous asset to invest in. After your death, wealth transfer can be stressful since the transfer of assets incurs tax obligations. Tax-exempt insurance can protect the value of your assets so that more of your wealth is passed down to your beneficiaries. It covers your tax obligations, thereby eliminating the need for your heirs to sell off your estate to pay off estate taxes. To learn more about which life insurance policy is best for your financial plan and retirement planning, you should consult a financial professional. Our wealth managers are experts in the field of wealth transfer and tax mitigation. Contact us to get started on planning a financially secure future for you and your family.
Making a Charitable Donation
Philanthropy is a goal of many high-earners, not just because of the positive public image it provides them but also because of the tax benefits it brings. Whether you donate cash or securities to any charity, any capital gain will not be subject to heavy taxes. With a receipt, you can deduct your tax return and lower taxable income.
We suggest that you donate long-term appreciated assets such as real estate, bonds, or stocks. You won’t need to pay taxes on the gains they generate, and you can get a tax deduction equivalent to up to 30% of your adjusted gross income.
Tax Residency Planning
Wealthy investors tend to have multiple estates, properties, and businesses spread across different locations. This can open you up to dual residency and dual taxation if you don’t plan ahead. Some states charge you on any income generate through your business even if you’re not a resident of that state.
Some high-tax states charge high net worth clients with the highest tax bracket, in the form of federal tax income, real estate tax, investment income tax, and more. After you retire, you can consider relocating to a no-income tax states to save your wealth.
If you’re unsure about your residency status, you might want to consult with an expert to save yourself from the complications of dual taxation. Finding the right financial advisor who knows the besttax strategies for high income earners can be a challenging task. With a high net worth, you want someone who is capable of handling multiple assets and a high-value portfolio. For your convenience, we have written the Ultimate Guide on finding the best financial advisor for investors with over 10 million dollars in liquid assets.
Invest in Dividends
If you’ve ever wondered, “Why are billionaires not taxed?” the answer might lie in dividends. Most of the income billionaires have is generated through shares in a company that provides profits to its shareholders. These, along with long-term capital gains, are taxed at a much lower rate than earned income.
Although this is not an exhaustive list of tax strategies for high income earners, these are some commonly used methods to lower the amount you own on your tax return. For a more personalized tax reduction plan, you might want to consult a professional such as a wealth manager. At Pillar Wealth Management, we give fiduciary advice to clients with 5 million to 500 million dollars in liquid assets. We can help you capitalize on tax planning strategies suited for your unique financial profile. Contact us today to arrange your first meeting.