Tax planning begins as we enter a new year. Most folks frown and roll their eyes at this situation. Even though the idea of doing taxes can make some people anxious, it doesn’t have to. Numerous options exist for controlling your tax bill, especially for high-net-worth individuals who receive high check stubs. In order to help you feel secure and prepared for tax season, we have listed our most useful tax-management strategies below.
Make A Health Savings Account contribution
Triple tax savings are provided through health savings accounts (HSA). You can make a pre-tax contribution, pay no income taxes, and then take the funds tax-free to cover medical costs.
Unused funds roll over a year and are effectively converted to an IRA at age 65 when they can be withdrawn without penalty for non-medical expenses. To be eligible for an HSA, you must be enrolled in a high-deductible health plan, but wealthy families typically are fine with this.
If you are able to pay for medical costs out of pocket and leave the HSA funds to grow tax-free, they can be a terrific tax management tool. Individual and family HSA contribution caps set by the IRS for 2021 are $3,600 and $7,200, respectively.
If you’re 55 years of age or older, you might also be eligible to make $1,000 annual catch-up payments. This technique is still viable for the 2021 tax year as you have till April 15 to make your donations qualify for the prior year’s tax return.
Make A Traditional IRA contribution
If your salary is within specified limits, contributing to something like a traditional IRA is just another option to minimize your AGI. You can effectively lower your current-year tax bill by making contributions using pre-tax money, but when you withdraw the money in retirement, you’ll be responsible for paying taxes both on the contributions and the portfolio growth.
Traditional IRAs’ $6,000 contribution cap for 2021 also includes a $1,000 catch-up contribution for people over 50. For the 2021 tax year, donations may be made up to April 15th, just like HSAs.
Donate To A Charity
Annual donations to approved charities may qualify as an acceptable itemized deduction, which is a very effective way to reduce taxes. To take advantage of the larger standard deduction, you must have itemized deductions totaling more than $12,550 for single filers and $25,100 for married couples filing jointly for the whole tax year. Consider bunching your donations or making several years’ worth of donations in one year if your deductions are less than this amount.
Another choice is to contribute a big sum all at once to a donor-advised fund, which will then allow you to disperse the money over a number of years to various organizations. By applying this technique, you can maximize the tax benefits of your donation by itemizing deductions during the year you make the initial donation and taking the standard deduction the following year.
Distributions To Qualified Charities
If you have a qualified retirement account, individuals can utilize a qualified charitable distribution (QCD) to get a tax break for their philanthropic contributions. Because this is an above-the-line deduction, it could be combined with other charitable tax management techniques.
A qualified charitable distribution (QCD) is a gift from your retirement fund to the charity of your choice. It can be included in your required minimum distribution (RMD) for the year but won’t be included in your taxable income.
Use Qualified Retirement Plans To Defer Income Tax
Qualified retirement plans provide deferred income tax advantages, the same as traditional IRAs. The maximum annual contribution for qualifying retirement plans like 401(k), 403(b), and 457s in 2022 is $20,500 ($27,000 if you’re over 50), and many businesses offer these plans.
Since these payments are taken out of your paycheck on a regular basis, they won’t be included in your yearly income. Similar to typical IRAs, when money is withdrawn in retirement, you will be taxed on either the contributions or the account growth. Taxes can be effectively postponed until your retirement years, when you can be in a reduced tax bracket, by making the most of your contributions.
Take Into Account A Roth Conversion
Roth IRAs are a popular choice for saving money since they don’t impose required minimum distributions (RMDs), allow tax-free withdrawals after age 59½, and let you leave money to your heirs tax-free.
Unfortunately, there are income restrictions on Roth IRAs, and if your income is too high, you might not be allowed to open an account at all. You can instead pay the taxes required to convert a standard IRA to a Roth by doing so. As a result, you can benefit from tax advantages and see your money grow for as long as you wish.
Make Use Of Tax-Loss Harvesting
Tax-loss harvesting entails offsetting gains in your portfolio by selling investments at a disadvantage. Your ability to offset the taxes due on capital gains is dependent upon achieving a capital loss. In order to preserve the desired asset allocation and anticipated return, the sold investments are often replaced with comparable securities. Exploiting an investment loss to reduce your tax bill, can be a terrific method to get the most out of a losing scenario.
Tax-Management Strategies To Avoid
It is extremely important to make sure that you are simply using morally correct and legal procedures when adopting tax management strategies for those who receive large amounts of checks. There is, after all, a distinction to be made between tax reduction and flagrant tax avoidance, the latter of which may result in IRS fines and, in the worst instance, criminal charges.
Tax evasion includes, among other things, willfully underreporting income and making inflated or fictitious tax deduction claims. A strategy for reducing your tax liability and protecting wealth while avoiding IRS penalties can be developed with the assistance of a reputable tax expert.
If you’re lucky enough to become a high-net-worth person, you have a duty to preserve and safeguard your riches.
One important aspect of that conundrum is tax planning. High-net-worth 1099 independent contractors should think about a number of tactics and actions that can have a big impact on their taxes, such as making contributions to retirement accounts, using the full HSA allotment, harvesting investment losses, and more.
