If you’re in a higher tax bracket, chances are you’re looking for tax reduction strategies — and we don’t blame you. Taxes take a large chunk out of your hard-earned income and it can be difficult to know exactly which tax strategies will work best for you.
To make it more challenging, keeping up with the neverending tax law changes can be exhausting. Just take the proposed Biden estate tax plan or the Tax Cuts and Jobs Act of 2017 for example. This is why your number one tool for reducing your taxes is to hire a financial advisor. If you work with a financial advisor who is a fiduciary, they are legally obligated to make all tax decisions with your best interest in mind.
Avidian Wealth Solutions is a Houston-based fiduciary wealth management firm that offers high net worth tax strategies. Taxes are an inevitable part of accumulating wealth, but we can suggest several strategies to help reduce their impact on you and your family’s finances.
How do high-income earners reduce taxes?
So, what is a tax reduction strategy?
There are countless ways that you can reduce your tax burden. Though, most of them center around distributing your income in a tax-efficient manner. This includes everything from maxing out your tax-advantaged retirement accounts to contributing to a health savings account (HSA).
The right tax strategy for you will depend on your unique financial situation and goals.
Here are five common tax reduction strategies:
1. Consider long-term capital gains
Part of tax-efficient investing is considering how taxes will affect the buying and selling of assets.
The tax you pay when selling an asset, whether it’s a stock, jewelry, or real estate, is dependent on how long you’ve held the asset. If you’ve had an asset for more than a year before selling, it’s considered a long-term capital gain and therefore is taxed according to graduate thresholds. In other words, the tax rate for long-term capital gains can be 15% or lower. Whereas short-term capital gains (assets sold before that one-year mark) are taxed at the same percentage as your normal income. This means you could be paying up to 37% in taxes for short-term capital gains.
2. Max out your tax-advantaged retirement accounts
Retirement accounts can act as great long-term tax-sheltered accounts. There are two different kinds of retirement accounts, tax-deferred and tax-exempt. Tax-deferred accounts are your traditional accounts where contributions are made pre-tax, like a traditional 401(k). Tax-exempt accounts include Roth IRAs and Roth 401(k)s where contributions are made post-tax.
Regardless of which account you’re contributing to, it’s in your best interest to max out your yearly contributions and to take advantage of those tax breaks, not to mention any matching programs your employer may offer.
3. Contribute to a Health Savings Account (HSA)
A health savings account is a great way to take advantage of your pre-tax income while potentially lessening the impact of health care costs. You can then use this money, tax-free, to pay for eligible expenses including deductibles, copays, prescriptions, and countless other medical costs.
4. Take advantage of tax-deductible donations
If charitable gifting and giving is something of interest to you, you may want to consider making tax-deductible donations. There are different ways to do this, one of which includes taking advantage of qualified charitable distributions (QCD). A QCD is a type of distribution made from your IRA to a qualified charity. Donating to charities through a QCD can save you thousands in taxes.
You may also want to consider opening a donor-advised fund (DAF) or family philanthropy.
5. Claim all allowable tax credits and deductions
This practice is going to look different for employees than it does for businesses. If you’re a business or are self-employed, you may be able to reduce taxable income by deducting expenses such as health insurance premiums, mileage, office or home office space, internet, utilities, etc.
You’ll also want to ensure that you’re claiming any of the tax credits that you can. This could include the Earned Income Tax Credit, American Opportunity Tax Credit for eligible students, and child tax credits.
Continue reading: How to Choose a Top Wealth Management Firm in Houston
Avidian Wealth Solutions offers tax planning tailored to high-net-worth individuals
Tax strategizing can be a difficult part of money management if you’re trying to navigate it on your own. Working with the right financial advisor can make all the difference.
If you’re looking for a financial advisor in Houston to help with tax reduction strategies, your search isn’t complete until you’ve considered Avidian Wealth Solutions. We work in highly credentialed teams to help high-net-worth individuals and families with various aspects of tax planning including tax reduction strategies in retirement. Our advisors will work with your current financial team to create comprehensive tax strategies tailored to your financial goals.
We look forward to connecting with you. Request a meeting with us today!
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