Based on research, the top one percent of earners in the US pay over 40.1 percent in federal taxes. Hence, it’s no wonder that the wealthy are constantly looking for ways to lower their mounting tax burden. If this sounds like you, and your net worth exceeds $10 million, studying our guide titled 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning can give you a tremendous start for tax saving. For more comprehensive assistance, seek professional help from Pillar Wealth Management, a wealth management firm specializing in serving investors between $5 million to $500 million in liquid assets.
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.
Table of Contents
Meanwhile, this guide will walk you through some of the most effective tax strategies of the wealthy. But before that, let’s find out what the tax-free threshold in the US is and how taxes apply to bonuses.
What Is the Tax-Free Threshold?
In the US, the tax-free threshold refers to the amount of money a person can earn without having to pay taxes on it, set by the government. When you start earning over this amount, each additional dollar is be regarded as taxable income.
This minimum income amount also depends on your age and filing status. For example, if you’re under 65 and your filing status is single, your minimal taxable amount should be $12,550. To dig deeper into the tax-free threshold in the US, schedule a video consultation with our wealth managers at your earliest convenience.
Are You Taxed Higher on a Bonus?
While most taxpayers understand how taxation applies to their individual situation, many fail to understand how taxation works for bonuses. Some raise queries like, “Are you taxed higher on a bonus?” or “Are bonuses taxed at 25 or 40 percent?”
Although bonuses are subject to taxation, they won’t simply be added to your income and be taxed at the top marginal tax rate. A bonus is rather counted as supplemental income that’s subject to federal withholding at a flat rate of 22%. Hence, the bonus is not taxed at 40%, but this withholding can add up to 40%. Irregular payments like these are typically subject to statutory withholding, no matter what you put forward on your W-4. The Federal withholding is either 35% or 22.5%, plus 7.65% for FICA.
Now that you have a fair idea about the tax-free threshold and how bonuses are taxed, let’s move on to the tax strategies wealthy people use to boost and protect their net worth.
Top Tax Strategies of the Wealthy
Here are the top tax-saving strategies the richest Americans leverage to protect their fortunes.
Launch a Business
Launching a business not only opens up a new source of income, but it also provides several tax advantages. Many expenses incurred during regular business activities can be deducted from your income, thereby minimizing your tax obligation. For such self-employed persons, their health insurance premium is one of the most critical tax deductions, but certain special requirements must be met to benefit from them.
Similarly, an entrepreneur can use the home office deduction to deduct part of their home expenses by strictly complying with the guidelines issued by the Internal Revenue Service (IRS). A portion of internet fees and other utilities used in the business may also be deducted from their taxable income.
These deductions are only possible when you run a business for profit. According to the IRS, you’re engaged in a business for profit if you realized a profit in three of the last five years. To examine all the factors the IRS considers, study Publication 535.
You may also get tax savings as an employer. Enacted in 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act provides tax incentives for employers who offer retirement options to their employees and join multiple-employer plans.
Hold on to Your Assets Longer
You know that smart investing decisions can boost your wealth. But did you know that certain types of investments such as stocks, real estate, and mutual funds lead to promising tax treatment for long-term capital gains?
Holding on to your capital assets is the key here. As an investor, if you hold a capital asset longer than a year and make a capital gain upon selling it after that period, you may benefit from a capital gains tax rate of 0%, 15%, or 20%, based on your level of income. If you sell an asset within a year, the capital gains you realize will be taxed at ordinary tax rates.
If you genuinely want to build your wealth, take the time to understand short-term versus long-term capital gains rates. For 2022, a single individual filing would pay 0% on any long-term capital gains as long as their taxable income is under $41,675, and in the case of a married couple filing jointly, the zero-rate bracket applies to taxable income up to $83,350.
Another way you can save on taxes is through tax-loss harvesting, which enables you to sell investments that are not doing well, replacing them with similar investments, and using those losses to offset realized investment gains. As the end result, more of your money will stay invested and generate returns for you and less will go to taxes.
Moreover, it’s important to keep your investment portfolio in check and keep assessing it under expert advice. Our Performance Guide should be of great help in this case.
Employ Your Children
If you own a business, hiring your own children and turning your venture into a family affair offer potential tax benefits, helping you put more money in your pocket. The IRS states that in a sole trader or partnership business, where each partner is a parent of a child under 18, the payments made for their services won’t be subject to Medicare or Social Security taxes. Hiring your kids may also lower your taxable profits.
In other words, what you’re doing is transferring some of the amount you’d pay in high taxes on your business income to your child as salaries for the services they’re offering. However, to benefit from this tax strategy, not only should your child’s work be “legitimate,” but their salary should also be “reasonable.” To learn more about how you can benefit by employing your children at your business, schedule a video consultation with our wealth managers at your earliest convenience.
Earn Not from Your Job, but from Investments
One of the biggest characteristics of smart, wealthy individuals is that instead of working for money, they make their money work for them. This can be a tax-saving strategy too. On earned income, you can end up paying taxes at rates as high as 37%. Investing in high-yielding stocks is a great alternative.
Investments that offer distributions, such as master limited partnerships (MLPs) and real estate investment trusts (REITs), are designed to generate a steady income. With stocks, you receive dividends at regular intervals. Or you may invest in real estate by purchasing properties and earning rent on them. For you to start seeing returns, however, you’ll need to make significant investments upfront.
In the case of stocks, when they have appreciated, and it’s time to sell them after a year, the capital gains tax rate you pay on the gains will be low. As mentioned earlier, you’ll be 0%, 15%, or 20%.
On the other hand, for real estate assets such as a property you’ve rented out, you can deduct your property taxes. Yet, renting out properties has its own set of complications. Not only will you have to find reliable tenants who make rent payments on time and take care of your property, but you will also be required to conduct periodic improvements and address urgent repairs.
Also, whether you want to grow your existing investments or make new ones, our guide titled 5 Critical Shifts For Maximizing Portfolio Growth Strategies — For Families Worth $5 Million To $500 Million should prove very insightful.
Claim Your Tax Credits
The Earned Income Tax Credit and many other IRS tax credits help you minimize the amount you pay in taxes. For 2022, a low-income taxpayer can claim credits of a maximum of $560 with no children, $3,733 with one child, $6,164 with two children, and $6,935 for three or more children.
Also, you may benefit from the American Opportunity Tax Credit, which provides up to $2,500 of annual funding to qualifying students in their first four years of higher education. Similarly, the Learning Credit offers a maximum credit of 20% for qualified expenses of up to $10,000 or $2,000 per return.
Moreover, low- or moderate-income individuals can leverage the Saver’s Credit, through which they can get a credit of up to 50% of their contributions to an IRA, an ABLE account, or another plan.
Depending on your income, you may also benefit from the Child and Dependent Care Credit, which can help balance expenses toward the care of disabled dependents and children. To find out which additional credits might be available to you, schedule a video meeting with our wealth managers.
Donate Your Required Minimum Distributions to Charity
Wealthy retirees often have a lot of income coming in from different sources, precluding the need for their required minimum distributions (RMDs) from their retirement accounts, which only elevate their tax bill. Qualified Charitable Distribution (QCD) is an incredible solution. It refers to the transfer of funds from a retiree’s IRA custodian directly to a qualifying charity. This transfer is counted as the RMD, keeping it from being counted as taxable income.
An experienced wealth manager can offer high-quality advice like QCDs. Use our guide titled Ultimate Guide to Choosing the Best Financial Advisor for Families worth $5 Million to $500 Million to find the right wealth manager or financial advisor.
Show Your Business Losses
The wealthiest people often manage multiple businesses to diversify their risk. Any losses made by one business is offset by the profits generated from others. But it’s not just the profit-making business that prove beneficial for them. They’d roll forward any losses made from any of the businesses and claim a tax refund for them. In financial terminology, business losses are also referred to as net operating losses (NOL), which typically result when the tax deductions exceed taxable income.
It doesn’t seem fair if the difference is negative in a year but positive in some of the other years, leading to tax payable. The NOL balances that inequity. Hence, using the loss of the previous year, you can reduce your taxable income and thus minimize your tax burden this year.
But how do things work out as per the current law if you have an NOL? Before anything else, you must first carry back the full NOL amount for a particular number of years. After carrying back the losses, if an NOL remains, you may carry the losses forward. Carrying forward enables you to apply the loss towards your income in future years. Also, you may choose to carry forward an NOL for up to 20 years, and not carry it back at all.
The more you’re able to pile up losses, the higher your tax refund will be.
To sum it up, when you’ve made so much effort in making money, why not take the extra time researching how you could save on taxes? The higher your net worth, the more you can be expected to pay in taxes. If you don’t want to lose an enormous amount of money in unnecessarily high tax payments, study and implement the aforementioned strategies and save as much as you can.
If you’re a high- or ultra-high net worth individual, minimizing your tax burden can be pretty complex. Pillar Wealth Management, a high-profile wealth management firm that specializes in serving investors holding $5million to $500 million in liquid assets, can offer extraordinary help. Schedule a video meeting with our wealth managers and get an idea about the guidance we can offer.
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