When you’ve worked hard to build your net worth, you want to keep as much of that money in your pocket as possible. Tax Saving Tips for High Income Individuals: High income earners typically pay a higher tax rate, but there are many tax planning opportunities for high income individuals to consider that will lower their tax rate.
Check out these Five Tax Saving Tips for High Income Individuals.
1. Maximize Estate and Gift Exemptions
The federal estate tax applies to the portion of an estate’s value that exceeds the exemption level. The current estate tax exemption is $11.70 million for individuals and twice that for married couples.
For the 2021 tax year, the gift tax exemption is $15,000 for individuals and $30,000 for couples, which means you can give up to this amount per beneficiary without being taxed or causing the beneficiary to pay tax relating to the gift.
2. Contribute to a Defined-Benefit Plan
Contributing to a defined-benefit plan reduces your taxable income, therefore reducing the amount of tax you owe. The nice thing about a defined-benefit plan is that it’s similar to a pension plan, and you can contribute to it even if you’ve maximized your 401(k) contributions.
As with many tax saving vehicles, there are rules and requirements for defined benefit plans. They must be funded by an employer and the employee must have worked a set amount of time for the company. If a defined-benefit plan sounds like an appealing way to save tax, you’ll want to make sure you abide by the plan rules.
3. Donate to Charity – Tax Saving Tips for High Income Individuals
While donating as a way to save tax may not be news to you, tax law changes in recent years have increased the amount you can donate. The CARES Act has made it possible to donate up to 100% of your adjusted gross income for 2020 only.
For high income individuals, this can offer huge tax savings as well as major support for your favorite charities at a time when they need it most.
4. Get Help Managing Your Assets
The more assets you amass, the more complicated things could get taxwise. Creating a structure to manage those assets, such as a limited liability company, could offer money saving opportunities like the ability to deduct management fees.
5. Manage Capital Gains and Losses
Not all investments are winners, and the winners don’t always perform consistently. Incurring investment losses offers the opportunity to offset those losses against gains on other investments, but that may mean selling investments to trigger those gains.
Qualified Opportunity Funds offer opportunities to manage capital gains by offering incentives for holding the funds with tax-free gains available after ten years.
As with any tax consideration, these tax saving tips for high income individuals must be evaluated on a case-by-case basis and may not work for everyone. If you’re a small business owner, be sure to check out our Year End Tax Planning for Small Businesses.
At the end of the day, it’s important to analyze your unique tax situation to determine the best course forward. We can help with that. Schedule an introductory call today.