Hello everyone, its Joe Milici here, and today I want to talk to you about smart tax planning strategies for high-income earners. As a financial advisor, I frequently have meetings with high-income clients, and one of their top concerns is how to reduce their tax liabilities. After all, you don’t want to see a significant portion of your income going to taxes when you’re earning a lot of money.
What are some strategies high-income people can employ to reduce their tax liabilities? In this article, I’ll briefly discuss strategies that can help you reduce your income tax and build wealth simultaneously as a high income earner.
What Exactly Is a High-Income Earner?
According to the IRS, a taxpayer who reports $200,000 or more in total positive income (TPI) on their tax return is considered a high-income earner. The total of all positive sums indicated for various courses of income recorded on an individual tax return is referred to as total positive income. You might believe that high earners are those who make $400,000, $500,000, or more annually, therefore it’s important to understand that. Although you might not be aware of it, you might possibly meet the IRS standards of a high-income earner.
Here are some of the best ways to reduce taxes for high-income earners.
Contributing to a Charitable Organization
Many rich incomes have philanthropic goals, not just because it gives them a good public image but also because of the tax advantages it offers. Any capital gains you give to a charity, whether in the form of cash or stocks, won’t incur high taxes. You can lower your taxable income and deduct your tax return with a receipt. We advise you to gift long-term appreciated assets like equities, bonds, or real estate. Gains they produce won’t be subject to taxation, and you’ll be able to deduct up to 30% of your adjusted gross income from your taxes.
Health Savings Account
The Health Savings Account (HSA), which can be used to pay for dental and eye treatments as well as other medical costs that may not be covered by your health insurance, is an essential component of your retirement strategy. You can use the money in your HSA to cover co-payments and taxes if you choose a health insurance plan with a high deductible. The tax advantages an HSA provides for high-income earners are one of its main perks. Your HSA contributions are free from FICA taxes, state and local taxes, and federal income taxes. Additionally, you won’t pay taxes on any withdrawals made for medical expenses. These tax benefits may be a useful resource for wealthy investors. They can efficiently manage their healthcare bills and enable their contributions to grow tax-free by putting a percentage of their pre-tax income into their HSA. By doing this, you may maximize your healthcare spending and increase your retirement savings.
Deposit funds into a 529 account
A tax-advantaged tool that can be used to help you pay for education costs is a 529 college savings plan. Federal tax deductions are not available for the money you contribute, while certain states may provide a tax benefit for 529 donations. However, when used for qualified school costs, the money in the account grows tax-deferred and withdrawals are tax-free. Your income tax situation may not change as a result of your contribution to a 529 plan, but your estate tax burden may decrease. For instance, you can make a single 529 contribution that is up to five times the yearly gift tax exclusion amount. These donations would then no longer be included in your overall taxable estate. \
Think About Moving to Roth
100% tax-free qualified distributions are possible with Roth IRAs throughout retirement. If you earn more than a particular amount, you might not be eligible to contribute to a Roth IRA if you have a high income. However, you can transfer assets from a standard IRA to a Roth IRA. At the time the conversion is finished, the tax would need to be paid on it. But coming forward, you’d be allowed to distribute money from your Roth account in a way that doesn’t subject you to income tax. Additionally, you would be allowed to put off starting at age 72 the needed minimum distributions.
Depreciation
Investors can lower the amount of tax they pay on their investments by using depreciation, a popular tax planning approach. Depreciation, which is simply the decrease in value of the asset over time due to usage, aging, and wear and tear, can be recovered when you buy an investment property. Your taxable income can be decreased and the amount of tax you owe decreased by claiming depreciation. For investors who own rental properties, depreciation is particularly advantageous. You can offset the rental income you get and lower your tax obligation by reducing the property’s deterioration. As a result, you can keep a larger portion of your rental revenue and use it toward your loan or other real estate investments. Remember that you must be knowledgeable in tax rules and regulations in order to properly collect deductions. It is advised that you engage with a skilled financial advisor to make sure you are accurately claiming expenses and maximizing the benefits of this tax planning technique.
Planning for Tax Residency
Rich investors typically own a number of buildings, businesses, and estates spread out over many areas. If you don’t prepare ahead of time, this could expose you to dual residency and dual taxation. Even if you don’t live there, several states tax you on whatever money you make from your business. High-net-worth clients in some high-tax states pay the highest tax rate on their income, real estate, investment income, and other types of revenue. You may want to think about retiring to a state with no income tax in order to preserve your riches. To avoid the difficulties of dual taxes, you may want to speak with an expert if you’re unsure of your status as a resident. It might be difficult to find the correct financial advisor that is knowledgeable on the best tax planning techniques for high-income people. You want someone who can manage many assets and a high-value portfolio if you have a large net worth. If you have any query I am here to guide you in detail.
Take into account alternative investments
You may be able to postpone taxes if you make certain investments and earn more money. For instance, cash-value life insurance enables you to build up cash value. The accumulated wealth increases tax-free. When withdrawals don’t exceed the total of your premium payments, they are not subject to taxation. Another element of your tax management plan can include pensions. In the case of a deferred annuity, for instance, you buy the contract with payments starting at a later time. The annuity’s value increases while being tax-deferred. Although you will eventually have to pay income tax on withdrawals, if you anticipate being in a lower tax bracket when you retire, this technique may be beneficial.
In the end, if you have a large income, there are a number of wise tax planning techniques you can employ to reduce the burden of paying taxes. You may assist ensure that you keep more of your hard-earned money in your pocket by increasing your retirement contributions, investing in tax-efficient securities, and making plans for tax residency.
I hope these strategies were beneficial to you. As always, don’t hesitate to get in touch with me if you have any questions or want to talk about your specific tax planning issues.
