13 Sep 5 Tax Planning Strategies For High-Net-Worth Individuals
Top 5 Tax Planning Strategies For
Guest Blog by Lyle Solomon
While everyone should think about careful tax planning, if you have investable assets worth at least $1 million, such as stocks, mutual fund shares, or cash, you are a high-net-worth individual, and smart tax planning is even more vital.
If you filed for a tax deadline extension and plan to pay your taxes on October 15th, 2022, keep reading because, in this blog post, we will explore a few updated tax methods for 2022 that will help you protect more of your wealth.
Tax Planning for High-Net-Worth Individuals
Make the Most of Your Retirement Accounts
The first step towards lowering your tax burden should be to maximize your retirement account (s). Traditional Individual Retirement Account contributions are tax deductible and can reduce your tax burden. Employees can contribute up to $20,500 to their 401(k) in 2022, with 50 and over able to contribute an additional $6,500.
If you have extended your tax filing time limit until October 15th, consider making these types of contributions to tax-advantaged accounts before you pay your taxes.
However, remember that the IRS will not allow you to deduct these payments if your modified adjusted gross income (MAGI) is $78,000 or above, or if a workplace retirement plan covers you. In 2022, the IRA tax benefit also phases out for married couples filing jointly with a combined MAGI of $129,000.
This is a popular tax-cutting tactic among wealthy people. Tax-loss harvesting is offsetting capital gains by selling underperforming or losing investments. When taxpayers sell securities, they can deduct their losses from capital gains. These losses are deductible for up to $3,000 in wages and other income taxes. You can also reinvest the proceeds of the sale in various securities that meet your investment objectives.
When undertaking these types of transactions, keep in mind the wash-sale rule, which provides that if you sell an asset at a loss and then buy the same or make a “substantially identical” investment within 30 days of the sale, the loss is usually disregarded for current income tax purposes.
Tax Planning for Charitable Giving
Another option for high-income taxpayers looking to minimize their taxes is charitable contributions, and you are doing good for others while simultaneously receiving a tax break. Killing two birds with one stone.
In most circumstances, your charitable donation deduction cannot exceed 60% of your adjusted gross income (AGI), but in some cases, limits of 20%, 30%, or 50% may apply. For an extra tax benefit, if you are over 70 1/2, you can avoid paying income tax on up to $100,000 in charitable donations made yearly from a regular IRA.
The tax deduction is determined by the type of asset donated and the type of charity presented to. Certain charities, such as 501 c(3) groups, are eligible for tax-deductible donations; however, charitable deductions are subject to annual limits.
It is a good idea to consult with a financial counselor or tax planner before making your donation.
Discharged Debts That Are Not Taxed
If you recently had a debt settlement, you’re undoubtedly aware that you’ll have to pay some tax for it, right? If you obtain a debt settlement much less than the total amount owing.
Debt forgiveness can sometimes be subtracted from your taxable income. Certain debt forgiveness is not taxable, according to the IRS.
Taxpayers may be entitled to exclude or become less taxable income from the following categories of canceled debt:
- Bequests and gifts.
- If the price is reduced after purchase (e.g., seller reduces the debt on solvent taxpayer’s property).
- Some student loans.
When understanding these, consult a certified tax professional with debt settlement experience to know in what circumstance you do not have to pay tax.
Increase Your HSAs
This is another method for saving money on taxes. HSAs allow you to pay qualifying medical expenses with pre-tax cash, lowering your taxable income. Individuals can contribute up to $3,650, and families can contribute up to $7,300. The IRS permits HSA customers 55 and older to save an extra $1,000 every year.
Not only will contributing to an HSA reduce your taxable income, but your contributions will grow tax-free and can be rolled over from year to year with no withdrawal requirement. Furthermore, there are no income limits on HSA contributions, so people with high incomes can fully utilize this tax-saving vehicle.
Your HSA funds can be used for medical and dental expenses and related charges such as over-the-counter medications and first aid supplies. You will have to pay tax if you withdraw money and use it for non-qualified expenses.
Maintaining and protecting your wealth is a vital duty, especially if you are lucky enough to be a high-net-worth individual. Tax planning is essential to safeguard your wealth, and tax-saving tactics for high-income earners could help you owe the IRS less each year.
However, keep in mind that the tax code is constantly evolving. So, what works this year may not be as successful – or even possible – in three or five years. Regularly monitoring your tax position will help prevent missing out on savings opportunities.
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Author Bio: Lyle Solomon is a licensed attorney in California. He has been affiliated with law firms in California, Nevada, and Arizona since 1991. As the principal attorney of Oak View Law Group, he gives advice and writes articles to help people solve their financial problems. For specific questions about this blog, please contact Lyle Solomon directly at firstname.lastname@example.org or find him on LinkedIn, https://www.linkedin.com/in/lyle-solomon/