Tax Planning Strategies for High-income Earners, and you may be one of them. The IRS is actively pursuing a strategy to target and harass high-income Americans. The surprising thing about this is how low they draw the dividing line compared to what most people would expect. If your annual income is more than $200K, you are undoubtedly in their sights. The good news is that there are various tax methods for high incomes that can dramatically lower your income tax burden.
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If you consider the simplest tax return, you might gain some understanding of where to seek tax breaks. Conceptually, the IRS strategy is rather straightforward. The 1040 form gives instructions on how to report your income, deduct expenses, utilize the resultant “taxable income” line to calculate your tax rate, and occasionally apply for some tax credits. This straightforward idea, however, can be quite difficult to implement.
Tax Planning Strategies for High-income Earners
Utilizing Cash Value Life Insurance Policies
After you have used up all of the aforementioned pre-tax savings methods, you may decide to focus on tax-deferred savings.
A life insurance policy with a modest death benefit and the highest premium allowed can be utilized as a tax-advantaged vehicle for saving money. Without being subject to yearly contribution minimums as 401(k)s and IRAs are, using life insurance as an investment vehicle can offer benefits like tax-deferred growth within your cash value and tax-free cash withdrawals via policy loans.
Most notably for high-income individuals, life insurance plans are not restricted by income restrictions.
Taking advantage of all of your allowable tax deductions and credits
Tax deductibility refers to costs that can be deducted from your taxable income (and therefore your tax liability). Several tax credits may be used to lower your tax burden dollar for dollar. There are more deductions and credits available for company income, but there are also plenty of alternatives if you are a W-2 employee. Some certain deductions and credits phase out and disappear as income grows, while others are not. It is critical to address this with your tax adviser since most tax consultants give a questionnaire for tax preparation, and completing the questionnaire assists the tax advisor in determining whether deductions and credits are available to the client.
Select Investments that are Tax-efficient
You can invest in tax-efficient securities and assets to increase and sustain earnings. Investing in resource-based industries, such as oil, gas, renewable energy, mining, and others, provides several tax advantages. These companies can “renew” the charges they incur on you, which you can then deduct on your tax return up to the amount you invested in the correct structure. This decreases your net revenue overall.
Income splitting and trusts
As a high-income person, this is one of the most significant tax tactics for you.
Family trusts or partnerships, when correctly constituted, can assist you in transferring investment earnings to family members with lower marginal tax rates. This must normally be done within the limits of yearly gift exclusions or loans. When there are children involved, we must keep the kiddie tax restrictions in mind.
Trusts can also assist decrease your state income tax responsibility on investment earnings, so even if the federal tax rate remains unchanged, there are state tax benefits. This is a critical technique for inhabitants of high-income tax jurisdictions who have substantial investment income.
Selecting Tax-Friendly Holdings Within your Portfolio
Contrary to common assumptions, not all investments are created equal. Some investments, such as interest and dividend distributions, produce additional taxable events. As a result, being aware of your underlying assets might potentially reduce your tax obligation.
For example, if you buy tax-free municipal bonds, the interest you earn on such bonds is exempt from both federal income tax and net investment income tax (Medicare surtax). Furthermore, if you acquire an identical bond from your home state, the interest on those bonds may be tax-free as well.
Another example is the “asset placement” strategy, which involves putting high-tax investments in tax-deferred or tax-exempt accounts rather than taxable accounts.
As a result, if you wish to reduce taxes and buy a small-cap technology stock, you might consider putting the assets in a taxable brokerage account. In general, these firms do not pay dividends, thus all of your gains will come from a stock price rise. Realizing profits from a growth-oriented stock permits you to retain it for more than a year and be taxed at long-term capital gain rates rather than higher short-term gain rates.
While this is not a full list of Tax Planning Strategies for High-income Earners, it does cover some frequent approaches for reducing your tax return. Consult a Gamburg CPA tax specialist for a more specific tax reduction approach.
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