Wondering what happens to your tax liability with proper financial planning? Professional financial planning can help you leverage strategies that can reduce the burden of your tax liabilities. Most commonly, this is done through claiming all eligible deductions and expenses, donating to qualified charities, maxing out your tax-advantaged retirement accounts, and working with a qualified financial advisor.
What is tax liability?
Your tax liability is the money you owe in federal, state, or local taxes. The amount you pay in taxes is determined by your income or through the capital gains made during the sale of an asset. The only way you would avoid having any federal tax liability is if your income is low enough that you don’t meet the threshold for filing a tax return. But for most high earners, between your income and investments, you’re likely to bear at least some tax liability in a given year.
Determining your tax liability
Wondering how to determine tax liability? An easy way for employees to figure their tax liability is to subtract their tax deductions from their taxable income. If you’re self-employed. a business owner, or a high-net-worth individual, determining your tax liability can be more complicated. There are a lot of additional factors that need to be considered, and the more sources of income you have, the more complex the calculations can become. When dealing with a large number of assets and/or multiple income streams, it could be in your best interest to ask an advisor for help. Be sure to inquire about deferred tax liability as well, as it is necessary for preparing for future tax payments.
How to reduce tax liabilities as a high-net-worth individual
If you want to reduce your tax liability, here are four tax strategies for high net worth individuals, families, and business owners:
Claim all eligible deductions, exemptions, and credits
According to the IRS, there are federal tax credits and deductions for:
- Family and dependents
- Income and savings
- Health care costs and deductions
- Education costs and deductions
- Work-related deductions
- Investment-related deductions
If you are eligible for any of the above, claiming them on your tax return may result in more money back. That said, you may also want to consider how much is being withheld month to month. What you claim on your payroll tax exemptions can result in having more or less withheld in federal taxes on each paycheck.
Another strategy to minimize your tax liability is to ensure that you are claiming all of the tax credits that apply to you such as Earned Income Tax Credit, American Opportunity Tax Credit for eligible students, and child tax credits.
Donate to qualified charitable organizations
If you donate to qualified charitable organizations throughout the year, you may be able to claim these tax-deductible donations on your tax return. You also have the option of opening up a donor advised fund (DAF). A DAF is a tax-advantaged giving account that allows you to donate both simple and complex assets to charity. Donations made through a DAF make you eligible for income tax deductions and eliminate capital gains tax on any appreciated assets you donate.
Max out your tax-advantaged retirement accounts
Maxing out your retirement accounts is a great way to prepare for retirement while reducing your taxable income. Different types of accounts will offer different contribution limits and tax savings depending on which accounts you choose/which accounts are offered to you.
For example, contributions made to an employer-sponsored 401(k) are made pre-tax from your gross income and will be taxed at your income rate based on the current tax brackets when the money is withdrawn. Contributions made to a Roth IRA, on the other hand, are made with your already taxed income and therefore do not face additional taxes at the time of withdrawal.
You and your financial advisor can determine which retirement strategy is best suited to your financial goals.
Hire a fiduciary financial advisor
If you’re looking to decrease the burden of your tax liability through financial planning, one of the most efficient ways to establish a proper plan is by working with a financial advisor. Working with a fiduciary financial advisor can help you implement tax strategies across various facets of your financial goals including estate planning, retirement planning, investment management, and more.
Why a fiduciary? The difference between a fiduciary vs broker is that fiduciary financial advisors are legally obligated to make decisions with your best interests in mind. Fiduciaries are commonly fee-based, meaning that they earn a majority of their income through flat fees rather than through commissions. This pay structure, in combination with a fiduciary’s legal requirement to disclose and avoid any potential conflicts of interest, can give you added peace of mind that your advisor is truly working in your best interest — not their own.
You can read our article to learn more about the difference between a fee-based and a performance-based financial advisor.
Avidian Wealth Solutions offers effective tax planning for high-net-worth individuals and business owners
So, what happens to your tax liability with proper financial planning? When you work with a financial advisor in Houston, they can help you decrease the amount you pay in taxes each year by helping you make the appropriate claims on your tax documents including tax-deductible donations, and optimizing your retirement savings.
Avidian Wealth Solutions is a fee-based, fiduciary wealth management firm that works with your current financial team to offer effective tax strategies. We can help with various areas of your tax planning including strategic tax return reviews, high-net-worth income tax reduction strategies, tax-efficient investment portfolios, management of short- and long-term capital gains, estate tax planning, annual tax-loss harvesting, and more. Request a meeting with us today to get started.
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