Are you one of the many high-net-worth individuals who believe they are paying too much in taxes? If so, you’re not alone. In our experience, most Americans can relate to the feeling.
If you feel that your taxes are too high, there are strategies you can implement to minimize the impact of your taxes. In this article, we will discuss why you may be paying so much in taxes and offer insight into what you can do to minimize your tax bill.
Why do I pay so much in taxes and get so little back?
There are a number of reasons why you may be paying too much in taxes and not getting enough back from the government. Here are some of the most common causes:
1. Inflation rates may be increasing the tax brackets
Inflation can play a role in how much you pay in taxes. If the cost of living goes up but your income hasn’t increased, you may find yourself in a higher tax bracket than you were in the past. This happens specifically when tax brackets are not adjusted for inflation. However, when they are adjusted for inflation, the tax bracket creep is lessened.
2. The government may be taking a larger share of your income
This can happen when the government implements new tax laws that result in higher taxes for certain groups of people or when the tax brackets are not adjusted for inflation.
For example, the tax law that was passed in 2017, known as the Tax Cuts and Jobs Act (TCJA), resulted in a large tax cut for corporations and the wealthy, while middle-class taxpayers saw little to no change in their taxes. The TCJA raised the standard deduction while eliminating personal exemptions and capping state and local tax deductions.
3. You may be in a higher tax bracket than you were last year
If your income has increased, you may be in a higher tax bracket than you were last year. This means you will pay a higher tax rate on the income you earn over the threshold for your tax bracket. When you’re in the highest tax bracket, you’re paying a marginal tax rate of 37% on your last dollar of income. If you earn an additional $100, you’re only bringing home $63 after taxes.
4. You’re not taking advantage of all the deductions and credits you’re entitled to
There are a number of deductions and credits available to taxpayers, but many people don’t take advantage of them because they’re unaware of their existence or they’re not sure how to claim them. These deductions and credits can include deductions for:
- Retirement savings (i.e. traditional IRA contributions and 401(k) contributions)
- Medical expenses (doctor visits and prescriptions)
- Student loan interest
- Mortgage interest
- Credits for children and dependent care expenses
- Credits for adoption expenses
5. You’re ignoring tax implications on your investment choices
If you’re investing in products that are subject to high capital gains taxes in Texas, you’re going to end up paying more in taxes than you would if you had invested in something that’s not subject to capital gains tax. Now that doesn’t mean you shouldn’t still diversify your investments, but it’s important to be aware of the tax implications on your investment choices, especially in regard to retirement tax planning.
6. You’re not using the right filing status
There are five different filing statuses to choose from when filing your taxes. The filing status you choose from will affect the amount of taxes you owe.
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er) with dependent child
If you’re not sure which filing status to choose or how to optimize your W2 or Form W-4, you may want to consider seeking some professional advice for tax planning in Houston. An advisor will be able to help you review your tax brackets as well as your withholding amounts and offer advice on the amount you should have withheld from your paychecks depending on your marital status and number of dependents.
What can you do if you owe too much taxes?
Ensuring that you’re not overpaying in taxes can be tricky, but it’s important to do what you can to minimize your tax liability. Here are a few of the things you can do to lower your taxable income and make sure you’re not overpaying in taxes.
Keep in mind that your tax strategies should be unique to your financial circumstances and not all of these will be applicable to you. To receive a customized tax plan that compliments all areas of your wealth plan, contact the multidisciplinary team of advisors at Avidian Wealth Solutions.
Review your withholding amounts
The first step is to review your withholding amounts on your W-4 form. This will ensure that you’re having the right amount of taxes withheld from your paychecks and you can adjust your withholding amounts if needed. If you’re not having enough taxes withheld, you may want to consider increasing the number of allowances you claim or have additional taxes withheld from each paycheck.
Make estimated tax payments
If you’re self-employed or have income that’s not subject to withholding, you may need to make estimated tax payments. Estimated tax payments are made four times a year and are used to pay your taxes on income that’s not subject to withholding. This includes income from interest, dividends, capital gains, rental income, and alimony.
Pay your taxes in installments
If you can’t pay your taxes in full, you can set up a payment plan with the IRS. You can either make monthly payments or set up an installment agreement where you make payments over a period of time. The IRS has a few different options for payment plans, so you’ll need to decide which one is best for your circumstances.
Use a tax credit or deduction
If you’re eligible, you may be able to lower your taxes by claiming a tax credit or deduction. There are a number of different credits and deductions available, so be sure to do your research to see if you qualify or consult with your wealth manager.
File an extension
If you can’t pay your taxes by the April deadline, you can file for a tax extension. This will give you an additional six months to file your return. However, it’s important to note that an extension to file your taxes is not an extension to pay your taxes. You’ll still need to pay your taxes by the April deadline, even if you file for an extension.
Looking to leverage tax savings strategies? Call Avidian Wealth Solutions!
Are you wondering, “Why are my taxes so high?” Several reasons you may be paying too much in taxes include rising inflation rates, changes in your filing status, or an increase in your income. However, there are things you can do to help lower your taxable income and make sure you’re not overpaying in taxes — hiring a financial advisor who offers high-net-worth wealth management is one of them.
If you have any questions or need help with your taxes, don’t hesitate to contact Avidian Wealth Solutions. Our multidisciplinary team can help you understand the tax code and make sure you’re taking advantage of all the deductions and credits you’re entitled to in each area of your financial plan from estate planning to your Houston retirement strategies and beyond.
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