Tax Reduction Planning
"Taxes are the price we pay for a civilized society.” ~ Oliver Wendell Holmes Jr.
Be that as it may, we are not obligated to pay more than is legally required. Using the framework of current US tax law, our nationwide team of tax experts will review your current tax environment, including personal, business, real estate and retirement related activities, and make sure that you are paying the full amount expected of you but nothing more. Here are just a few of the aspects of your tax life that might be optimized:
1. Taking Advantage of All of Your Allowable Tax Deductions and Credits
Tax deductions are expenses that can be deducted from your taxable income (and therefore your tax liability). There are also a lot of tax credits available, which reduce your tax liability dollar for dollar. There are more deductions and credits available against business income, but there also is a good amount of options if you are just a W-2 employee. There are deductions and credits that phase out and disappear as income increases, but some are not subject to income limitations. It is important to discuss this with your tax advisor, as most tax advisors provide a questionnaire for tax preparation, and completing the questionnaire helps the tax advisor determine which deductions and credits are available for the taxpayer to take advantage of.
2. Income Splitting and Trusts
This is one of the most important tax strategies for you as a high-income earner. If properly structured family trusts or partnerships can help you move your investment earnings to family members with lower marginal tax rates. This has to generally be done within annual gift exclusions, or loans. If children are involved, we have to be mindful of the kiddie tax limitations. Trusts can also help reduce your state income tax liability on investment earnings, so while the Federal tax rate stays the same, there are savings on state taxes. This is an important strategy for residents of high-income tax states with significant investment income.
3. Business Owners - Hire Your Kids!
A tax planning strategy for individuals that have their own business is to hire their children. If you have children who are of legal working age and have free time to do administrative work for your company, consider adding them to the payroll. A business owner is not required to pay Social Security and Medicare taxes on their children’s earnings as long as the children are under 18 years old, and their earnings are taxed at the child's tax rate. If you are using this strategy, please remember to pay your children a fair market value salary.
4. Benefit From Non-Taxable Income
There are a few types of income that are not subject to taxation, so if you have those types of income, it is tax-free. For example, income in a Roth IRA, income in a life insurance contract, income from renting your home for less than 14 days, income from being an original owner of a corporation for more than 5 years (up to $10,000,000 of the gain on sale can be excluded), etc.
5. Use the Real Estate Exemption or a 1031 Exchange
In real estate, there are a few main ways to reduce or defer taxes depending on the property usage. If it is your primary residence, and you sell it after you used it as such for more than two years, you can exclude up to $250,000 ($500,000 if married filing jointly) from the gain. If it is a rental property, you can consider doing a 1031 exchange, where the proceeds of the sale of the first property are invested into a new property, creating a tax deferral on the gain.
6. Make Donations to Charity
Philanthropy is a goal for many high-income earners, not only because of its positive public image but also because of the tax benefits. There is no tax on any capital gain if you donate cash or securities to a charity. Receiving a receipt allows you to deduct it from your tax return to reduce your taxable revenue. It is recommended that you donate appreciated assets such as real estate, bonds, or stocks for the long term. You will not be taxed on their profits and can claim a tax deduction of generally up to 30% of your adjusted gross income.
7. Invest in Companies That Pay Dividends
You’re not alone if you’ve ever questioned why billionaires pay lower taxes. The answer could be found in dividends. The majority of billionaires’ wealth is derived through shares in a company that generates money for its shareholders. Long-term capital gains, like these, are taxed at a significantly lower rate than earned income.
8. Select Investments That are Tax-efficient
To generate and maintain more profits, you can invest in tax-efficient securities and assets. Investing in resource-based companies, such as oil, gas, renewable energy, mining companies, and others comes with many tax benefits. These businesses can “renew” the costs they incur, which you can then deduct on your tax return up to the amount of the investment you made with the proper structure. This reduces your overall taxable revenue.
9. Make a Contribution to Your Company's 401(k)
You can reduce taxable earnings by maximizing your 401(k) contributions, and thus reduce your income taxes. Business owners and self-employed individuals can generally defer larger amounts for retirement. The maximum amount also depends on the type of retirement plan in place. For W-2 employees, it is important to contribute as much as they can to the plan at their respective workplace. For business owners and self-employed individuals, it is also important to choose the right type of retirement plan, which would allow the maximum contribution.
10. Utilize a Charitable Remainder Trust coupled with a Donor Advised Fund
A planned gift is one that integrates personal, financial, and estate planning goals with a donor’s giving, regardless if the giving is done while they are alive or at the time of their death. Many planned giving vehicles are available, including bequests, donor advised funds, private foundations and charitable trusts. Often the best results can be attained by combining a vehicle like a donor advised fund with another vehicle such as a charitable remainder trust (CRT).
Benefits of a Charitable Remainder Trust to a Donor:
1. Taking Advantage of All of Your Allowable Tax Deductions and Credits
Tax deductions are expenses that can be deducted from your taxable income (and therefore your tax liability). There are also a lot of tax credits available, which reduce your tax liability dollar for dollar. There are more deductions and credits available against business income, but there also is a good amount of options if you are just a W-2 employee. There are deductions and credits that phase out and disappear as income increases, but some are not subject to income limitations. It is important to discuss this with your tax advisor, as most tax advisors provide a questionnaire for tax preparation, and completing the questionnaire helps the tax advisor determine which deductions and credits are available for the taxpayer to take advantage of.
2. Income Splitting and Trusts
This is one of the most important tax strategies for you as a high-income earner. If properly structured family trusts or partnerships can help you move your investment earnings to family members with lower marginal tax rates. This has to generally be done within annual gift exclusions, or loans. If children are involved, we have to be mindful of the kiddie tax limitations. Trusts can also help reduce your state income tax liability on investment earnings, so while the Federal tax rate stays the same, there are savings on state taxes. This is an important strategy for residents of high-income tax states with significant investment income.
3. Business Owners - Hire Your Kids!
A tax planning strategy for individuals that have their own business is to hire their children. If you have children who are of legal working age and have free time to do administrative work for your company, consider adding them to the payroll. A business owner is not required to pay Social Security and Medicare taxes on their children’s earnings as long as the children are under 18 years old, and their earnings are taxed at the child's tax rate. If you are using this strategy, please remember to pay your children a fair market value salary.
4. Benefit From Non-Taxable Income
There are a few types of income that are not subject to taxation, so if you have those types of income, it is tax-free. For example, income in a Roth IRA, income in a life insurance contract, income from renting your home for less than 14 days, income from being an original owner of a corporation for more than 5 years (up to $10,000,000 of the gain on sale can be excluded), etc.
5. Use the Real Estate Exemption or a 1031 Exchange
In real estate, there are a few main ways to reduce or defer taxes depending on the property usage. If it is your primary residence, and you sell it after you used it as such for more than two years, you can exclude up to $250,000 ($500,000 if married filing jointly) from the gain. If it is a rental property, you can consider doing a 1031 exchange, where the proceeds of the sale of the first property are invested into a new property, creating a tax deferral on the gain.
6. Make Donations to Charity
Philanthropy is a goal for many high-income earners, not only because of its positive public image but also because of the tax benefits. There is no tax on any capital gain if you donate cash or securities to a charity. Receiving a receipt allows you to deduct it from your tax return to reduce your taxable revenue. It is recommended that you donate appreciated assets such as real estate, bonds, or stocks for the long term. You will not be taxed on their profits and can claim a tax deduction of generally up to 30% of your adjusted gross income.
7. Invest in Companies That Pay Dividends
You’re not alone if you’ve ever questioned why billionaires pay lower taxes. The answer could be found in dividends. The majority of billionaires’ wealth is derived through shares in a company that generates money for its shareholders. Long-term capital gains, like these, are taxed at a significantly lower rate than earned income.
8. Select Investments That are Tax-efficient
To generate and maintain more profits, you can invest in tax-efficient securities and assets. Investing in resource-based companies, such as oil, gas, renewable energy, mining companies, and others comes with many tax benefits. These businesses can “renew” the costs they incur, which you can then deduct on your tax return up to the amount of the investment you made with the proper structure. This reduces your overall taxable revenue.
9. Make a Contribution to Your Company's 401(k)
You can reduce taxable earnings by maximizing your 401(k) contributions, and thus reduce your income taxes. Business owners and self-employed individuals can generally defer larger amounts for retirement. The maximum amount also depends on the type of retirement plan in place. For W-2 employees, it is important to contribute as much as they can to the plan at their respective workplace. For business owners and self-employed individuals, it is also important to choose the right type of retirement plan, which would allow the maximum contribution.
10. Utilize a Charitable Remainder Trust coupled with a Donor Advised Fund
A planned gift is one that integrates personal, financial, and estate planning goals with a donor’s giving, regardless if the giving is done while they are alive or at the time of their death. Many planned giving vehicles are available, including bequests, donor advised funds, private foundations and charitable trusts. Often the best results can be attained by combining a vehicle like a donor advised fund with another vehicle such as a charitable remainder trust (CRT).
Benefits of a Charitable Remainder Trust to a Donor:
- Annual income during the timespan of the CRT for the beneficiary
- Potential for growth of income over time
- Investment diversification
- No capital gains tax on gifts of appreciated assets
- Charitable income tax deduction
- Gift and estate tax savings