More income doesn’t necessarily mean a high tax rate especially when you have a tax consultant or financial advisor who can help you manoeuvre the menacing federal tax policies.
There are plenty of tax reductions strategies one can employ to reduce their tax burden which most high-income earners are not aware of. So in this blog here, with inputs from our tax consultants at Outsourced Bookkeeping we are going to discuss 5 simple and effective tax strategies that can help you provide relief. Read on:
Leverage the retirement benefits: Employer-based accounts like 401(k) and 403(b) help reduce the taxable income as the amount is not taxed until withdrawn from the accounts. Though the income is lower as you contribute to these accounts, the total tax you will have to pay is much lower than the tax you end up paying without contribution.
Similarly, Roth IRA conversions can also be used for benefit since it enables tax-free withdrawals. This strategy can help in case of a high tax bracket during retirement and even if it is not the situation, timing these conversions to coincide with a lower tax bracket can reduce the tax amount to be paid for conversions. Either way, it is beneficial to take advantage of the tax-reducing benefits of these accounts by contributing maximum income to reduce the tax burden.
Avoid concentrated stock positions: High-income earners like senior executives who accumulate a large concentrated stock from their employer. Not only had this concentrated stock position exposes the individual to a high risk of volatility it is also not tax-efficient when it accrues significant gains. Structured stock selling, exchange funds, gifting stock to family or charity, leveraging trust for selling are some of the options one can consider to reduce the tax burden and risk. Since there are so many variables, it is advisable to take help from financial advisors or tax consultants like Outsourced Bookkeeping before taking the step.
Splitting your income: One of the most common and also effective tax strategies is to shift the investment earnings to family members with marginally lower tax rates. This is simple and effective, especially when perfectly structured with partnerships and trusts. Loans, annual gift exclusions are one way to accomplish this in addition to leveraging trusts to reduce income tax (state) on earnings through investments. Also one can leverage tax cuts by buying assets in the name of a spouse or family with a lower marginal tax rate.
Wait before you sell: The difference between short term and long term gains can be leveraged to save tax on your profits too. So if you are looking to sell a capital asset or stock, we request you to wait for at least 12 months.
While the capital asset that is sold after 12 months will incur a lower tax rate that ranges from 0 to 10%, the asset that is sold before 12 months may incur up to 37% in tax. In a few cases selling before the 12 months might even shift you to the highest tax brackets levying high tax rates. So if possible we recommend you wait and leverage this tax rate difference to make tax savings.
Leverage Home Sales Tax: If you are a high-income earner who is planning to sell your primary residence then you may further save on your tax on up to $500k of your capital gains. One can avail of this benefit provided you are married, file a joint tax return and the home is the primary residence.
For example, if you are making a $1 million profit on the sale of your primary residence. At a usual tax rate of 20%, you will have to pay $200k in taxes but that is not usually the case. Provide you file tax jointly, you need not pay taxes on $500k you make and $500k is counted as long-term capital gains. So 20% of $500k is your adjusted tax which accounts for $100k in savings and $100k in taxes.
How Outsourced Bookkeeping can help?
Estate and gift exemptions, increasing equity exposure, charitable donations, health savings, social security and Medicare, buying municipal bonds, tax loss harvesting and more; there are plenty of opportunities for high-income earners to reduce their tax burden. Being one of the best bookkeeping, accounting and tax consulting firms in the business, Outsourced Booking regularly leverages every option available to help our clients make significant savings.
In addition to providing full-spectrum bookkeeping and accounting services, our team of experienced CPAs and tax experts also provided the best tax preparation and consulting services for businesses and individuals. So if you are looking for an outsourced accounting firm to lend a helping hand with tax preparation and discover new tax–saving opportunities you can contact us here: https://outsourcedbookeeping.com/