How to Avoid Double Taxation and Retain Maximum Amount of Your Wealth
Just like every other American, high-net-worth as well as ultra-high-net-worth individuals are quite familiar with paying taxes on their wealth. However, unlike the average American,affluent individuals have to face a much larger tax bill that can seriously affect their financial health and future in the long run. They often have to face progressive tax rates, multiple kinds of taxes on different types of incomes, and even bear double taxation at times. All this leads to them losing a sizeable portion of their wealth every year, which not only hurts their financial position but also takes them further away from achieving all their financial goals in life. That’s why it is so crucial for such affluent individuals to work with an experienced and unbiased financial advisor who knows how to avoid double taxation and is well aware of the tax challenges faced by high-net-worth investors as well as strategies to overcome them. We suggest requesting a copy of our book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning, to discover how taxes can impact every part of your wealth management and financial position.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.
Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
At Pillar Wealth Management, we are no strangers to these tax problems ourselves. As a private wealth management firm, we have been helping high-net-worth clients sort out their tax hurdles for more than three decades now. We strictly deal with such affluent clients with $5 million to $500 million in liquid assets as we understand that such individuals require specialized services with expert skills. Our experienced wealth managers and financial advisors study each client’s case carefully, going through their personal circumstances and individual goals and targets before suggesting the most effective tax-saving strategies for them. You can learn more about which tax optimization strategies will work best for you by initiating a no-obligation consultation with us today.
In this blog, we’ll be discussing what double taxation is and some strategies on how high-net-worth individuals and families can avoid it. Let’s get started.
What is Double Taxation?
Double taxation is precisely what it sounds like. High-net-worth individuals get taxed twice on the same income that they are receiving.
As you can imagine, this can be a big problem.Getting taxed even once can be a huge deal for high-net-worth individuals as they tend to earn millions and millions every year from various income sources, andas a result, they tend to face just as large tax bills as well.
However, with double taxation, they face even greater tax charges which take away a significant portion of their wealth. There are usually two cases when double taxation takes place.
1. Corporate Double Taxation
Corporate double taxation is when the corporate earnings are taxed twice, once at the corporate level and then again at the individual level. Many high-net-worth individuals and families tend to run a business on a large scale, or even several businesses at times, and sometimes, they are also major shareholders within businesses.
Therefore, they often face corporate double taxation, which leaves them with much less wealth than they had planned. When a corporation earns revenue, the net income is first taxed with corporate tax. Then, when the same income is distributed to the shareholders in the form of dividends, they are charged with income tax again on an individual level.
As of 2021, the corporate tax percentage was 21%, and the income tax rate for the highest taxable income bracket was 37%. Therefore, as you can imagine, collectively, this can lead to a very high tax rate that causes high-net-worth individuals to lose a huge chunk of their wealth every year.
When it comes to corporate double taxation, there are people who support it as well as those who are against it. Some people justify the double taxation on the grounds that such corporations are separate legal entities from the individuals, and so, it is okay to tax them separately.
However, there’s no doubt that corporate double taxation imposes excessive tax bills on affluent individuals as well, which can severely hurt their financial position. We recommend requesting a copy of our eye-opening book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning, to discover how high taxes can affect all parts of your wealth and finances.
2. International Double Taxation
The other case when double taxation tends to occur is when there are multinationals operating in several countries. International double taxation takes place when a corporation or investor generates income in a foreign country.
That income is first taxed in that foreign country where the income was initially generated, and when that income goes to the original entity, they are taxed again in their home country. Such double taxation often results in a heavy tax burden and discourages investments across the border.
How to Avoid Double Taxation?
Taxes can be a big headache for everyone but even more so for high-net-worth individuals and those who face these double taxation charges. It not only leaves you with much lesser wealth, but it can also make your investment strategies ineffective as you keep losing any profits to excessive tax bills.
It can also leave high-net-worth individuals with an uncertain retirement as they might not be able to save as much as they would have liked or establish the kind of income stream that they need. Book a free conversation with us to discuss your tax and retirement planning challenges.
Moreover, it can also hinder a smooth transfer of wealth to your loved ones as they might end up paying a big chunk of their inheritance to taxes as well. The bottom line is that taxes can cause a lot of havoc in your life, and it only gets worse with double taxation.
So, then how to avoid double taxation? Here are a few options for the high and ultra-high-net-worth.
· Pass-Through Taxation
One way to avoid corporate double taxation is to set up pass-through business entities that only get taxed once. In such a case, the profits or income goes directly to the owners, and while they are taxed at the individual income rate, they don’t face double taxation as there is no corporate tax. Some of the pass-through business entities include:
• Limited Liability Companies (LLCs)
• Sole Proprietorship
• S Corporations
Although this can be hard to employ when you have a very large business as most high-net-worth individuals with $5 million to $500 million in liquid assets tend to have. Line up a free chat with our expert financial advisors to discuss the best tax-saving strategies for you.
· Retain Earnings
Another strategy that ultra-high-net-worth individuals can use is to retain the earnings from the business. This way, again, they can avoid double taxation by avoiding the individual tax on their personal incomes from the business.
The way to do this is to retain the earnings from the business and invest it back rather than distributing it as dividends. This not only helps avoid double taxation but also helps in growing the business further as it retains more funds.
· Pay Salaries Instead of Dividends
Shareholders in a business can become directors in the company or take up some other post to receive salaries instead of dividends. Their salaries will still get taxed at their personal income rate, but they will be able to avoid the heavy taxation from double taxation as the salaries are a deductible expense for the business.
· Employ Family
Similar to the above, you can also employ family members in the business and pay them salaries for their work. This way, they will get taxed for their income, but you will save on corporate tax, thereby avoiding double taxation.
· Double Taxation Agreements
For international double taxation specifically, high-net-worth individuals can resort to double taxation agreements (DTAs) to deal with the problem. This is basically an agreement between the two countries to minimize the damage caused by double taxation. The agreement might exempt the investor from getting taxed in one of the countries or getting tax credit in the other.
Other Tax-Saving Strategies for the High-Net-Worth
Simply avoiding double taxation is not enough, though. You might still be facing high tax charges from various other financial activities of yours. You will need to address those, too, if you truly want to minimize your costs and sustain your wealth throughout your lifetime.
If you are working with a financial advisor, they can suggest several tax-saving strategies depending on your unique situation. For instance, they might suggest altering your portfolio and including low-taxed or tax-free assets in the mix.
Instead of investing in highly taxable corporate bonds, they might suggest investing in municipal bonds instead, which are tax-free. You can go through our comprehensive guide on portfolio performance to learn about the complex procedure involved in creating an ideal portfolio for affluent individuals.
Similarly, they might also change your money management style and adopt a more balanced approach between active and passive management. Active money managers tend to incur more capital gains taxes as they are involved in a lot of transactions during the year and going after the latest trends in the market. Read our brilliant guide on portfolio growth strategies to see exactly how these two management styles affect your wealth in the long run.
Besides that, you could even move to a no income tax state.
High-net-worth individuals and families with $5 million to $500 million in liquid assets stand to lose the most in taxes every year. However, with careful tax planning and management, they also have the chance to save as much.
Unfortunately, double taxation is a reality that many high-net-worth investors and businessmen tend to face. But it doesn’t mean it’s entirely unavoidable. Again, with the right strategies, you can minimize your tax bill to retain the maximum amount of your wealth.
So then, how to avoid double taxation and reduce your taxes effectively every year? The answer lies in working with the right financial advisor.
Managing taxes is no easy feat, especially for high-net-worth individuals. These individuals might be involved in several financial activities, all of which may be incurring different types of taxes. They may have different short and long-term goals which could be impacted by their tax bills. Affluent individuals also tend to not know about the complex rules and regulations involved in tax management.
The right financial advisors understand all these aspects and know how to handle them. Their expertise is crucial for minimizing your costs and protecting your assets. Learn more about protecting your assets from our book, The Art of Protecting Ultra-High Net Worth Portfolios and Estates – Strategies for Families Worth $25 million to $500 million.
The financial advisors and wealth managers over at Pillar Wealth Management primarily aim to help affluent clients attain financial success and serenity. And one way to do this is through our extensive experience and expertise with tax planning and optimization. Along with that, we also offer investment and portfolio management, estate planning, retirement planning, risk management, and more. Consult our financial advisors in a free meeting today to discuss your tax challenges.
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