Tax Reduction Strategies For Investors – PillarWM
High net worth and ultra-high net investors fall into a higher tax bracket, prompting them to be on the lookout for the best tax reduction strategies. Since tax laws and legislations change frequently, you can benefit more from working with a tax attorney or a financial professional who understands how taxes impact your finances. To find high net worth tax, estate and investment management strategies request our & Secrets Guide. It is the ideal guide for families with more than 5 million dollars in investable investments.
Wealth managers at Pillar Wealth Management are fee-only, fiduciary advisors who have years of experience in tax planning for affluent families with 5 million to 500 million dollars in liquid investable assets. We can help you cut down on the factors that drain your wealth and help you grow your fortune. Click here to schedule a meeting with someone from our wealth management team.
Understanding Tax Basics
Before we start discussing the best tax reduction strategies for high-income earners, we will talk about the basics of taxes and your tax bracket.
The federal tax bracket is the tax percentage that applies to each tier of your taxable income. Your taxable income is your adjusted gross income minus line deductions that are permitted by the IRS. Determining your taxable income can help you identify which federal tax bracket you fall under.
For example, let’s assume you are wondering, “How much do you get taxed if you earn 50k?” On an annual basis, you would have to pay over 11% in taxes, that is, if you are single. If you’re married or have children, your personal exemptions can reduce this percentage.
Furthermore, there are different types of taxes, i.e., consumption taxes, progressive taxes, regressive taxes, and capital gains taxes. The ones that high net worth and ultra-high net worth individuals are most concerned with are the progressive taxes and capital gains taxes. Progressive taxes will include federal taxes and state income taxes. Capital gains taxes apply to any asset or high-value item you sell.
Lastly, tax deductions are those strategies that allow a high earner to reduce their tax liability by lowering their adjusted gross income. Many deductions can be used to significantly lower your tax bill in a legal manner. The two categories that tax deductions fall into are above the line and below the line.
Above the Line Deductions
Above the line deductions are meant to reduce your adjusted gross income and are applicable even if you itemize or accept the standard deduction. Reducing your adjusted gross income allows you to be eligible for more deductions and credits on your profit. This makes them advantageous for wealthy investors. Examples of above the line deductions include health savings account contributions, traditional IRA contributions, etc.
Below the Line Deductions
Below the line deductions are also known as itemized or standard deductions. They are determined after your adjusted gross income has been calculated. However, not all below the line deductions are effective in lowering your taxable income. For rich investors, in particular, itemizing deductions is more difficult presently. Though, with a proper plan, you can make use of below the line deductions such as contributing to charities and more.
Tax Reduction Strategies for High Net Worth Individuals
If you ever wonder, “How do the rich not pay taxes?” the answer is that they usetax reduction strategies, such as those listed below:
Contributing to Your Health Savings Account
Health savings accounts offer the advantage of allowing your money to grow tax-free, allowing tax-free withdrawals, and offering tax-deductible contributions. If you withdraw from your health savings account before you turn 65, you will need to present a qualified medical expense.
Contributing to Your IRA
Any contribution you make to your IRA account is tax deductible, changing with your income thresholds and whether or not you have a group retirement plan.
Contributing to Charitable Causes
The IRS allows you to pay contributions to your selected charitable organizations without any applicable taxes. This gives you the potential to save thousands of dollars while fulfilling your philanthropic goals.
Contributing to Your Retirement Plan
Contributions made to any retirement account are tax deductible, and since these deductions occur on your paycheck directly, they are not shown on your tax return. In other words, you can contribute to your 401(k) account or the retirement account set up by your employer to reduce your taxable income.
Converting Your Savings Accounts to a Roth
Roth conversions are a powerful tool used by high net worth and ultra-high net worth investors to reduce their taxes. Roth distributions are not considered as an investment income and are usually tax-free.If you have questions, feel free to schedule a meeting with one of our wealth managers to learn more.
Medical and Mortgage Interest Expenses
As of 2021, medical expenses that cost over 7.5% of your adjusted gross income can be deducted. Similarly, if you’re looking to buy a house, you can consider taking advantage of deducting the mortgage interest. This allows you to deduct up to 750,000 dollars. Both of these methods are below the line tax deduction strategies.
Restructure Your Company
If you’re a successful businessowner, your company’s tax structure can end up costing or saving you a lot of money. For example, a C-corp has a lower top tax rate than a sole proprietorship or S-corp.
Invest in Exchange-Traded Funds (ETFs)AndTax-Efficient Index Mutual Funds
Diversification is an important part of any investor’s portfolio. We discuss more on this topic in our five shifts guide, 5 Critical Shifts For Maximizing Portfolio Growth Strategies – For Families Worth $5 Million To $500 Millions.
Similarly, every wealthy investor should have a plan to diversify their income taxation in retirement. A tax-efficient index mutual fund or exchange traded funds(ETFs) can help reduce the taxes applicable on your investments on a year-to-year basis. Therefore, they are more efficient than actively managed funds.
Tax attorneys, wealth managers, and some financial advisors know how to effectively use these methods and more to help you retain as much of your wealth as possible. Our wealth managers can help you improve your portfolio’s performance to generate more profits. Read our Performance Guide to learn how they use cutting-edge strategies to boost your capital growth.
Why Do You Need Tax Reduction Strategies?
Affluent families face the fear of unforeseen threats and liabilities that can compromise their financial status. Our book,The Art of Protecting Ultra-High Net Worth Portfolios and Estates – Strategies for Families Worth $25 Million To $500 Million talks in-depth about this, giving advice on how you can protect your family from financial ruin.
Accumulating a fortune large enough to allow you to enjoy the life you want without fear of overspending is every investor’s dream. Over time, unforeseen circumstances can bring about expenses that eat away at your savings. If you don’t have a proper financial plan to refer to, one of these factors can be taxes.
When you work hard for decades building that fortune, it can be disheartening to see a significant amount of it be lost to taxes. This may prompt the question, “How much money can you make without paying taxes?”
Tax reduction strategies aim to help wealthy investors do exactly that. They work by lowering your taxable income so that you have to pay fewer taxes. This allows you to retain most of your wealth and savings. If you’re interested in using these strategies to mitigate your taxes, it would be in your best interest to hire a financial advisor or wealth manager. We have written The Ultimate Guide to Choosing the Best Financial Advisor for Families worth $5 Million to $500 Million to make this process simpler for you.
What are Tax-Deferred Investment Vehicles?
Tax-deferred investment vehicles are those which can be taxed sometime in the future or at a lower rate. Unlike tax-exempted assets, such as your Health Savings Account, a tax-deferred investment will have tax consequences related to the distribution of the asset.
They can be an effective tax reduction strategy for high net worth or ultra-high net worth investors to bring down their current year tax liabilities. Since tax-deferred accounts shelter income from current taxation, they also benefit by compounding earnings faster. Examples of tax-deferred investments include a 529 plan for your children’s education, qualified retirement plans (401k or 403b, etc.), and cash-value life investments.
Who Can Help You with Tax Management?
Tax management is a complicated aspect of financial management, requiring skill, knowledge, and expertise. While you can likely find many tax reduction strategies out there by yourself, not all of them are legal. One wrong step could end up with you facing tax evasion charges.
Hence, working with a financial professional is in your best interest. They can give you the proper guidance in which steps to take. If your wealth amounts to more than 10 million dollars, you don’t want to leave anything up to chance. You should hire the best of the best, and our Ultimate Guide can help get you there.
Tax advisors, tax consultants, and tax attorneys have advanced training and in-depth knowledge of tax accounting and tax law. They can identify suitable tax avoidance strategies for their client’s individual needs, helping them bring down the amount of money they owe to the IRS. They know the ins and outs of tax accounting and tax law, so you can rest easy knowing that you’re working with experts.
Other professionals who can provide you with tax advice or tax planning services include Certifies Public Accounts (CPAs), enrolled agents, and some financial advisors, such as wealth managers. Our wealth management services cover tax planning and management to help you maximize the wealth you save. If you would like to learn more about our wealth manager’s expert services, you can contact our team to schedule a meeting.
Conclusion
Tax management is a crucial part of cost control and achieving monetary serenity. The right tax advice can help you determine the correct deductions and applicable credits, plan and record your tax returns, lower your tax liability, and help you be more financially secure.Many wealth management firms offer tax planning as a part of their holistic financial management services.
At Pillar Wealth Management, our fiduciary, fee-only advisors have extensive experience in working for affluent clients with diverse investment portfolios. We cater exclusively to investors with a net worth of 5 million to 500 million dollars in liquid assets. Our wealth managers use specific tax reduction strategies applicable for high net worth and ultra-high net worth investors to help you cut your costs as much as possible. Schedule a consultation with one of our expert wealth managers to find out how we can help you secure your hard-earned money.
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