Proactive Tax Planning for Wealthy Individuals

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Wealthy people in Bountiful and surrounding areas need to think proactively about tax planning now more than ever. The current political situation is likely to lead to tax increases in several ways, including a hike in income tax rates and a jump in capital gains taxes. In addition, wealth tax exemption for estates might be cut back drastically, but nearly half, leaving much more of the wealth in your estate subject to tax. 

So what are the best ways of proactive tax planning? Let’s look at some of them.


Increase Your Tax Returns While Better Protecting Your Assets This Year


1. Maximizing Your Retirement Contributions

For all the government may be planning to take away by raising taxes, it has also given in the past. Defined contribution retirement plans such as 401(k)s are a tremendous form of tax savings today. If you contribute to a traditional 401(k) account, you can contribute as much as $20,500 this year, all tax-free, because contributions are taken out of your paycheck pre tax. The money then grows tax-deferred until you withdraw it at retirement.

In addition, folks 50 and over can contribute an additional $6,500 per year to their 401(k)s.

If you don’t have access to a 401(k) or similar plan, Individual Retirement Accounts (IRAs) are also suitable tax planning methods. For 2022, you can contribute $6,000 per year, tax-deductible if made to a traditional IRA. Folks 50 and over can contribute an additional $1,000 per year.

Another common way to contribute to your retirement accounts are through Roth 401(k)s or Roth IRAs, although the tax savings are slightly different. Unlike traditional IRAs or 401(k)s, Roth accounts do not reduce your taxes in the contribution year because contributions are made with after-tax dollars.

But Roth accounts do pay off tax-wise later in life! The money you have invested grows tax-deferred from the time of contribution, just like traditional retirement accounts do, and you will never pay any tax on it past the year of assistance! That means  your withdrawals  in retirement will be tax-free (as long as you’ve held it for at least five years).

What does retirement for the rich look like? It looks like fully funded retirement plans for many. Among the wealthiest Americans, more than 90 percent participate in these types of retirement plans. But among Americans in general, almost 50 percent don’t have any tax-advantaged retirement savings, like Roth accounts, at all.

2. Convert Traditional Retirement Accounts to Roths

Roth retirement accounts are excellent vehicles for tax savings because once you’ve held them for five years or more, you can withdraw the money and don’t have to pay tax on it. (They are also exempt from required minimum withdrawals, or RMDs, that kick in at age 72 and carry a hefty tax fine if they aren’t taken, so you don’t have to worry about that potential tax at all.)

But the allowable amount of Roth contributions diminish and then ceases entirely if your income is at a certain level, which can make them problematic for high-earning individuals. But there is a solution!

The solution is to convert money in your traditional retirement accounts to Roth accounts. You will have to pay a tax on the converted amount in the year it’s restored, but then, because it’s in a Roth, you can withdraw it at retirement tax-free.

3. Manage Your Potential Estate Tax

What is the wealth tax? Wealth tax is the tax paid on assets in your estate at your death before the assets pass on to your heirs. Currently, $11.6 million is exempt, meaning you only have to pay taxes on any amount over $11.6 million. However, the Biden Administration has recently signaled that it may lower the amount to around $6 million.

How can you manage the potential tax on your estate? One method is gifting while you are still alive. Currently, each individual can gift up to $16,000 per year to other individuals without incurring any tax. You could, for example, gift stocks, bonds, or cash.

You could also manage taxes on tangible assets by gifting. You could, for example, gift real estate to relatives in a lower tax bracket, so you don’t have to pay taxes and, although they will, their taxes will be less.

4. Manage Capital Gains

Capital gains tax is a tax levied on the appreciation of an asset such as stocks, bonds, or real estate. This tax is incurred on any asset that has been held for more than 1 year. Recently, the Biden administration has discussed raising the capital gains tax rates which are currently lower than the more well-known ordinary income tax rates.  If the capital gains tax rises, you may pay more on any profits realized at the sale of your assets.

There are several methods of managing capital gains taxes. You should first consider what assets are subject to capital gains tax. No assets owned in retirement accounts like 401(k)s, IRAs, or Roth IRAs are subject to capital gains tax. Once you’ve delineated which assets may be subject to capital gains tax, you can then begin to manage how to limit future capital gains taxes.

There are many ways to reduce or eliminate capital gains tax. You can gift appreciated assets to a charity or your family members in a lower tax bracket, tax-loss harvest appreciated stocks to capture the lower capital gains tax rates, and use tax-preferred investments like individual stocks and ETFs (avoiding mutual funds).

If you have assets subject to capital gains taxes we recommend you consult a tax professional to establish a capital gains budget. Capital gains taxes can be counterbalanced by losses per the tax code, so it’s possible to time your sales of any non-performing assets to lessen the capital gains tax bite. It’s complicated, however, so consulting professionals is the best route.

5. Contribute to tax-advantaged 529 plans

If you have family members such as children or grandchildren, contributions to 529 tax-advantaged plans that pay for their tuition and other educational expenses. These contributions can help you save on taxes. You can contribute up to $15,000 per year. Also note, the funds in a 529 plan can be used not only for college but for K-12 grades in private or religious schools.

6. Maximize your Health Savings Account

A Health Savings Account (HSA) is open to people enrolled in a high-deductible health plan (HDHP). The HDHP must have a minimum deductible of $2,800 for a family in 2022. If it does, you can contribute up to $7,300 tax-free each year for a family, meaning you don’t pay any taxes on that amount.

HSAs are designed as a way for individuals and families to cover medical expenses in a tax-advantaged account. 

HSAs can also be rolled over year to year, unlike another common health savings plan, the Flexible Spending Account (FSA). You can roll them over indefinitely if you need to.

Plus, you can invest your HSA funds in a wide variety of assets, such as stocks, whose gains will also grow tax-free until withdrawal.

7. Consider Charitable Giving

Giving to qualified charities can help your community, but it can also ease a tax bite. For 2022, you can deduct from 20 percent to 60 percent of your adjusted gross income (AGI) if it is given to qualified charities. Note that you can provide cash or the fair market value of assets, including stocks, vehicles, art, and other physical items.

Are you a high-income or high-net-worth individual and feel ready to discuss tax planning for wealthy management? Contact a financial advisor in Bountiful, UT today. Read: 6 Reasons to Hire a CERTIFIED FINANCIAL PLANNER™

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CERTIFIED FINANCIAL PLANNERS™ at Advanced Retirement Strategies

Working with a CERTIFIED FINANCIAL PLANNER™ is an excellent investment of your time and money. With the high standards for CFP® certification, you’ll know you’re getting the expertise and knowledge of a highly-trained and educated professional who will always act in your best interests and with the loftiest ethical standards.

Our team of retirement planners and investment advisors in Bountiful, Utah specializes in helping diligent savers with $250,000 or more of investment and retirement assets (not counting your primary residence) prepare for and then transition into retirement.

If you’re looking for a CFP® to help you live the retirement you have dreamed of, contact us now.

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