If you’re a high net worth individual with a high income, you are subject to high taxes, which can be as much as 50% of your income, putting a huge dent in your finances. However, financial advisor tax strategies can be devised to ensure that you don’t lose a high percentage of your wealth to taxes unnecessarily.
In fact, if you have $5 million or more of liquid wealth and want to learn about effective tax-saving strategies in depth, we recommend that you request a free copy of our book, 7 Secrets to High Net worth Investment Management, Estate, Tax, and Financial Planning.
If you have ever wondered, “How can I reduce my taxable income?” or “How do billionaires avoid taxes?” you need experts on board. At Pillar Wealth Management, our financial advisors provide holistic advice to families and individuals with $5 million to $500 million in liquid wealth. Our team is incredibly skilled at implementing specific tax-saving strategies that apply to the financial circumstances of affluent individuals. Schedule a free consultation with one of our wealth managers and get started with tax planning right away!
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Why Do High Net Worth Individuals Pay Higher Taxes?
The progressive tax system ensures that an individual’s taxes are calculated based on their taxable income. Since high net worth individuals are also high-income earners, they need to deal with a higher tax burden.
By calculating your taxable income, you can determine the amount of money you need to pay in taxes. You can calculate your taxable income by excluding IRS-permitted line deductions from your adjusted gross income. The result defines in which federal tax bracket you fall.
As an affluent investor, you should be aware of which taxes can be levied on you. State and federal income taxes are progressive. In addition, capital gains taxes are applicable on any high-value asset or item that you sell.
Using your investment gains to pay a hefty tax bill is counterproductive to any income-generating activity you use to increase your wealth. If you wish to know more about how affluent families secure their wealth, you can request a free copy of our book, The Art of Protecting Ultra-High Net Worth Portfolios and Estates: Strategies for Families worth $25 Million to $500 Million. This book contains in-depth insights that help rich individuals live a financially stable life.
What Does a Tax Strategist Do?
Tax strategists create personalized tax plans to ensure that you get the maximum benefit from minimum taxation. There are several strategies that are useful for individuals who have millions of dollars, such as the ones discussed below.
1. Using Tax Loss Cultivation
Tax-loss cultivation is a strategy whereby you sell certain investments at a loss to offset gains made by selling others. The result is that you only pay taxes on your net profit.
You can use the income you generate from selling the losing investments to purchase assets that are likely to grow so you can recover your wealth. The future profits can be balanced with future losses, thus creating a lucrative cycle of tax savings.
However, executing a tax-loss harvesting strategy isn’t as easy as it sounds. Trying to cultivate tax losses on your own is a labor-intensive and challenging task. In the past, this task was performed using an Excel spreadsheet, but now, a lot of the arduous work is done using software and managed by your tax advisor.
Recently, our wealth advisors at Pillar Wealth Management helped a client save over $30,000 in taxes just by managing her profits and losses. If you have invested liquid assets worth $5 million or more and wish to use tax-loss cultivation, get a free copy of our new book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning.
2. Paying Some Taxes Immediately
Another effective strategy to minimize taxes is to pay certain taxes immediately because paying them will cost less than deferring them to another year. This is especially true if you are currently in a low tax bracket year. In these situations, the appropriate tax strategy might be to register income sooner than when you initially planned or defer an expenditure. To find out if this strategy is suitable for you, head over to our website to book a free consultation with one of our team members.
3. Benefitting from Tax Credits
Tax credits are very much like incentives, and they can be effective in minimizing your tax burden. Even though tax credits don’t have a direct impact on your taxable income, they can be subtracted from your final tax bill, which can significantly reduce the amount you need to pay.
There are several things you can do to benefit from tax credits. Nevertheless, the most beneficial ones are adopting a child or paying for college. Of course, you should never adopt a child just to take advantage of tax credits! But if you are thinking of adoption, you should know about the tax credits you can receive.
In addition, you can sign up for college courses to continue your education. For instance, if you want to learn photography, you can enroll in a college course and benefit from a tax credit. Owing to the Lifetime Learning Credit, you have $10,000 per household to use for college credits each year, of which you can receive 20% in tax credits.
4. Working with A Tax Advisor
Certain life changes can have a huge impact on a person’s financial circumstances in terms of their tax obligation. These changes include marriage, having a child, divorce, unemployment, receiving an inheritance, and purchasing a retirement home.
To cope with such situations, many high-income earners choose to work with a competent tax advisor. These advisors help affluent individuals attain their financial goals by using strategies that are tailored to their specific circumstances. You can request a free copy of our book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning to find out why it’s important for your financial strategies to align with your goals.
How Can You Reduce the Income that is Taxable?
As a high-income earner, you need to keep in mind that tax planning isn’t just done at the end of the year. Rather, the more you earn, the more important it is to evaluate your tax plan frequently throughout the year.
For instance, one thing you can do is maximize your tax deductions. This might lead you to wonder what the best tax deductions for high-income earners are. Well, this is precisely what we will cover in this section, along with numerous other techniques to reduce your taxable income.
1. Start Saving for Retirement
The best way to lower your taxable income is to maximize your retirement savings. If your company offers an employer-sponsored plan, like a 403(b) or 401(k), you can make pre-tax contributions of up to $19,500. Individuals who are 50 years or above can make contributions of up to $6,500 above the limit. Since contributions are made pre-tax through paycheck deferrals, the amount you save in an employer-sponsored retirement account is a direct and simple technique to minimize your tax burden. Contact the wealth advisors at Pillar Wealth Management to start planning for your retirement today.
2. Use Roth IRA Conversions
Roth IRAs are tax-free retirement accounts that allow you to minimize your tax obligation even if you belong in one of the top income brackets. As opposed to a traditional IRA, you can make Roth IRA contributions from your post-tax income. This means you will have to pay taxes before you contribute, but not when you withdraw.
This might not appear to be a benefit, but it is. The income generated by your Roth IRA is not taxed. You can transfer your money in a 401(k) or a traditional IRA into a Roth IRA for the same advantages.
Ideally, you should do a Roth IRA conversion when you have had a year with less income than the previous year. You can even do it once you retire and temporarily fall into a lower tax bracket. This strategy is often ignored, especially by those who focus on deductions as a means of minimizing their taxable income.
3. Set up a Donor-Advised Fund
You probably know that donating money to a charity provides the opportunity for a tax deduction in the year you make the donation. However, you may not know that you can get a deduction this year for many years’ worth of contributions if you establish a donor-advised fund.
In simple words, a donor-advised fund is a charitable fund you can set up to determine when and how to allocate funds to charities. You can make contributions in a specific year and take the complete tax deductions for many years on your tax returns, hence lowering your tax burden. As you move forward, you can determine how much money to donate every year and which charity to donate to.
This strategy is useful for high-income earners, particularly if they have a year with higher-than-usual income due to a windfall or inheritance. It’s a great way to use charitable deductions to their benefit.
4. Maximize Your HSA Contributions
Sadly, many high-income earners either don’t know how to use their Health Saving Account properly or fail to contribute to it at all. If you’re eligible for an HSA, maximizing your yearly contributions offers a current year income tax deduction. In addition, it offers an additional avenue to save for medical costs in retirement.
An HSA offers three key benefits. Firstly, your contributions are tax-deductible. Secondly, your money increases tax-efficiently. Finally, the withdrawals are tax-free if you use that money to cover medical bills when you are over 65 years old. If you are 65+, you can make withdrawals without paying any penalties, regardless of the use. To derive the maximum benefit from your Health Saving Account, you should use it as a long-term investment for retirement instead of spending it now, assuming your existing cash flow is enough to pay for your current medical expenses.
Why is it Important to Use Tax-Saving Strategies?
The first and most obvious benefit of using tax-saving strategies is that they reduce your tax burden, helping you secure your hard-earned money for a better future and a stress-free retirement.
However, focusing on tax-saving strategies can also help you make productive investment choices. One of the primary objectives of these strategies is to direct taxable income to numerous investment plans. It focuses on the ideal use of resources for productive reasons and lessens your tax liability. For more information on how to make the right investment choices, read our guide Improving Portfolio Performance.
Using tax-saving strategies properly can even result in financial growth. Delineating clear and precise financial objectives for your investments over particular time horizons can help you develop a good corpus, thus leading to your financial well-being. If you have $10 million or more of invested assets, and need information on how you can reduce your costs, fees, and taxes, ask for a free copy of our book, 7 Secrets to High Net worth Investment Management, Estate, Tax, and Financial Planning.
Effective tax strategies can help you save a large part of your wealth. At Pillar Wealth Management, we know that meeting your goals requires more than just the highest investment gains. We believe that tax saving strategies are an indispensable component of your financial plan. Feel free to sign up for a meeting with our advisors to start saving on taxes!