The wealthy are often criticized in the media for not paying enough taxes when, in reality, they are simply using the opportunities that are given to all of us in the tax code. Everyone wants to decrease taxes. Here are some of the strategies wealthy people use, which you can use, as well.
Engage a tax expert to help you take advantage of all tax credits and opportunities. The fabulously wealthy don’t know the tax code. They hire people who do.
Plan for taxes throughout the year. Many people think about their taxes only at the end of the year, and then they discover that a few changes could have saved them a bundle. The wealthy think about the tax effects of their decisions throughout the year and check with their tax accountants before making them.
Get more of your income from equity rather than wages. Wage taxes are higher than taxes on long-term capital gains and dividends, so by funneling more of your money into stocks and bonds and holding them for at least a year, you can decrease your taxes by taking income from distributions or on the sale of the assets.
Save for retirement. The wealthy plan for the future in a tax-conscious manner, and so can you. Use as many pre-tax retirement opportunities as are available to you to decrease your taxable dollars: The most common are IRAs and employer-sponsored plans like 401k, SEP IRA, and SIMPLE IRA. Not only does this decrease your taxable income for the year in which you made contributions, but it also defers taxes until the year you begin to withdraw, when you will presumably be in a lower bracket. However, if you expect to be in a higher tax bracket at the time of withdrawal, other retirement vehicles may be better for you.
Plan to offset income by timing deductions. Some tax-payers have income that changes significantly from year to year. This can happen in careers that depend on commissions or when companies offer substantial bonuses. If these swings will push you into the next tax bracket, consider taking some losses on assets or making deductible purchases in the same year.
Make charitable donations and gifts. Both cash donations and the value of donations in kind, such as setting aside land for a conservation easement, can be itemized to decrease your taxes dollar-for-dollar. There are regulations about what organizations qualify and what records need to be kept, so be sure to talk to your tax accountant before making substantial contributions.
Some of these strategies require itemizing, and since the standard deduction nearly doubled as of 2018 to $12,000 for individuals and $24,000 for married couples filing jointly, you may not be able to deduct charitable donations or certain expenses.
At Koelle, we make it our goal to review your finances thoroughly in order to help you use as many of the opportunities and tax breaks available to you, and we will advise you throughout the year. If you’re in or around the Willow Grove, Huntington Valley, or Abington areas, please reach out to us so we can help you.