How to Lower Taxes on High Income: A Complete Guide | PillarWM
Are you wondering how to lower taxes on high income in the year ahead? You’ve come to the right place!
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.
Through effective tax reduction strategies, high-income earners can build their wealth by investing in the right products and enjoy lucrative returns in the long run. So, if you belong in the highest tax bracket, you will be delighted to know that there are several tax reduction strategies available to lower taxable income in 2022.
However, it is critical to note that you must be diligent enough to pursue them to obtain a result. Or you can contact a high-net-worth financial planning firm to guide you. At Pillar Wealth Management, we’re highly skilled in developing wealth and financial plans for individuals and families who have liquid assets worth anywhere between $5 million and $500 million. We use both active as well as passive management. This combination is utilized so that the best interests of every client are taken into account. You can even book a no-obligation meeting with one of our team members and learn about all the options you have to lower taxes in the upcoming year.
If you have liquid assets worth at least $5 million and above, you should request a free copy of our book 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning. The book is particularly geared toward high-income earners and ultra-high-income earners with $5 million to $500 million worth of liquid wealth.
Till then, here is all you need to know about how to reduce taxable income for high earners in 2021.
Table of Contents
How to Lower Taxes on High Income
While recent reports may make it seem like all “rich” people are able to avoid paying taxes, we assure you there are plenty of high-income and ultra-high-net-worth earners who feel they are inundated with excessive tax bills. There’s a reason why our phone lines are overwhelmed every year around tax season, with investors hunting for expert tax planning guidance beyond what they’re receiving from their own financial professionals. Co-founded by Chris Snyder and Hutch Ashoo, Pillar Wealth Management is an independent, fee-only, private fiduciary wealth management firm whose focus is to provide tailored wealth management advice to owners of privately-held companies and ultra-high and high net worth individuals and their families, who own liquid investable assets of over $5 million and are looking for financial serenity.
Tax Legislation Modifications
Changes to tax law in the U.S happen quite frequently, leading to an increased level of complexity. This, in return, can make it challenging for high-income earners to stay current and be preparedfor the latest changes. For instance, since 2017, there have been two major tax legislation overhauls!
The 2017 Tax Cuts and Jobs Act was one of the biggest overhauls of the tax code in decades. New tax law introduced small reductions to income tax rates for several individual tax brackets. However, the changes were only temporary and raised the standard deduction for joint and individual filers alike.
In 2021, a greater standard deduction of $25,100 for joint filers and $12,550 for solo filers make it harder for high-income earners to get sufficient deductions to itemize moving forward. If you have a liquid investable portfolio worth at least $10 million, you should definitely read our book to get useful insights related to tax planning. Moreover, in 2019, additional tax laws were passed, including the Taxpayer Certainty and Disaster Tax Relief Act and SECURE Act.
Both of these laws were substantial modifications. So, how can you leverage these tax laws? Well, depending on how you earn money, some of the tax-reducing strategies mentioned in this post might be available to you. However, some might be time-consuming and cost-prohibitive to implement, especially for those without multi-million-dollar investment portfolios or multi-million-dollar earnings.
Donating money to a charitable organization has long been a means for high-income earners to get a reduction in their taxes. And under new tax legislation, the amount deducted has increased to 60 percent from 50 percent of adjusted gross income. One of the effective ways high net worth and ultra-high net worth folks can protect themselves from exorbitant taxes is by creating conservation easements.
A conservation easement is basically a voluntary legal agreement between a government agency or a land trust and a landowner, permanently limiting the land’s use to protect its conservation value. Now, it’s important to understand that such a plot of land might certainly have some intrinsic value. Maybe it borders a river,or it is a migration area for birds or a lush green field in a region that’s becoming overdeveloped. You can often collaborate with land conservation trusts and receive a charitable tax deduction for the value of the conservation easement you placed on the land.
In addition to this, an average filer can receive a tax deduction for charitable contributions. However, in that case, they’ll have to overcome a greater hurdle because to do so, they have to itemize their taxes. The Tax Cuts and Jobs Act almost doubled the typical deduction to $24,000 for married couples and $12,000 for individuals’ filers in 2018. Thus, the itemized deductions will have to surpass those figures.
Income Acceleration/ Deferral
This concerns those who are wondering how to reduce taxable income in 2022. But keep in mind that accelerating or deferring taxable compensation is not the best approach for every scenario. It may lessen your exposure to capital/income gain taxes as well as the 3.8 percent Medicare surcharge on investment income.
Additionally, income deferment is not merely about delaying income in the ongoing year. Tax savvy people know that establishing an income deferral strategy for the long term can help them compound their investments and savings at a faster rate.
Another thing to note when considering tax reduction strategies for high-income earners is that the existing tax rates are not permanent and are scheduled to expire in 2025; thus, the income you earn in 2021 may be taxed at a greater rate later on.
Here are some leading income strategies to consider:
• Defer income until 2022—Find out whether your employer is willing to defer your income until the year ahead, especially if you’re getting a significant commission income and your taxable income this year may be higher than in 2022. Therefore, if you’ll be receiving any extra commissions or other kinds of earned income by the end of 2021, request your employer to defer paying the income till next year. In case your taxable income is lower in 2022, deferring your current income can lower the tax burden by moving the income to a lower tax bracket.
• Accelerate or defer IRA withdrawals upon retirement—Depending on your tax bracket, you can profit from delaying/accelerating individual retirement account (IRA) distributions to a later date. For instance, switching conventional IRA savings to a Roth IRA can be beneficial, especially if you’re expecting to be in a higher tax bracket in the future. Likewise, you can delay IRA distributions, especially if you want to lower your taxable income this year. Both strategies can help smooth out tax brackets over time and ultimately reduce retirement income tax.
• Non-qualified deferred reimbursement contributions—If your company provides a deferred reimbursement plan, it maybe possible for you to lower your taxable income this year and extend it toward your post-retirement savings. In our guide, Improving Portfolio Performance, we talk about how high earners can enhance their investment performance to meet their retirement goals.
Income Tax Deferral Investment Vehicles
Many people confuse income tax deferral investment vehicles with tax-exempts, such as HAS accounts or Roth IRA, but let us clarify — they aren’t the same. At some point, your distribution of assets will have to undergo tax consequences. Nevertheless, a tax-deferred account can prove to be a useful tax reduction strategy for high-income earners and can even reduce tax liabilities of the current year. In addition to this, a tax-deferred account also provides benefits by compounding returns faster as income can be sheltered from present year taxation.
Here are a few income tax deferral investment vehicles to consider:
• Cash-value life coverage—We feel this is perhaps one of the most effective tax reduction and deferral strategies for high-income earners due to the greater limits that can be invested. High-income earners can contribute to such a plan with after-tax money. However,the premiums paid aren’t taxed.
• 529 education plans—In this strategy, high-income earners can pay federal taxes on their contributions. However, the wealth grows tax-free. Moreover, the distributions for qualified educational expenses will not be taxed. Plus, there aren’t any yearly contribution limits. However, keep in mind that contributions over $15,000 (per donor/beneficiary) are counted as lifetime estate and gift tax exemptions. These accounts can also be used to pay private school tuition fees.
• Qualified retirement plans—Contributing to a 457, 403(b), or a 401(k) plan is undeniably one of the simplest ways to delay investment income. For those who aren’t aware, the SECURE Act of 2019 allows high-income earners aged 50 and above to save $26,000 every year in a 401(k) plan, providing them greater control once they reach retirement. In addition to this, another benefit is that your earnings will not be taxed until withdrawal. Put simply, you won’t have to pay tax on interest, dividends, and capital gains until you withdraw money from the account when you are 59 ½ years old or above.
For people who are wondering how to reduce taxable income for high earners in 2021, these strategies can be super helpful. They can use insights to create an effective tax-reduction strategy to maximize and safeguard their wealth. Or they can even take advantage of the services of a skilled wealth advisor who can optimize their strategy to achieve the desired results. If your investment portfolio is worth $25 million or above, you can use our hardcover book, The Art of Protecting Ultra-High Net Worth Portfolios and Estates- Strategies For Families Worth $15 Million To $500 Million, to develop a financial plan with maximum tax reductions. Or, if reading isn’t your cup of tea, and you need sound tax planning advice in-person, do sign up for a free video consultation with our wealth manager at a time that suits you best.
Finally, as a high-income earner, you must understand that having a high net worth makes you considerably different from ordinary investors. Your financial needs, wants, values, and goals differ substantially and make your overall wealth planning completely different. Moreover, these differences also have a significant impact on your wealth management decisions, the way you allocate your assets to secure them from market volatility, estate planning, as well as tax preparation.
Therefore, consider categorizing your income and wealth into three tax groups—taxable, tax-free, and tax-deferred —in order to best protect what you have earned and built. For high-income earners, how to invest business profits to avoid taxes and tax planning aren’t things that are considered only at the end of the year. They should be at the front of your mind throughout the year! And though there are several other, more creative ways to lower your taxes, the aforementioned strategies should definitely be on your radar.
If you want to know how to lower taxes on high income like a pro, meeting with an expert financial advisor is a good idea. No matter where you’re located in the USA, Pillar Wealth Management is there to help you with tax reduction and wealth management. With over 60+ years of experience in wealth management, we’ve established a reputation for delivering reliable, tailored solutions to high-net-worth and ultra-high net worth clients that have liquid assets between $5 million and $500 million. To start off, set up a free video consultation with one of our team members.
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