Tax Strategies the Wealthy Use
Have you wondered if you are maximizing your tax savings? Well, take a look below at 5 ways the wealthy save on taxes. Warren Buffett famously noted that he pays fewer taxes, on a percentage basis, than his secretary and other employees, since a bulk of his wealth is in stock rather than wage income.
1. Charitable Donations
Giving money to non-profit organizations has long been a way for the wealthy to get a deduction on their taxes. And under the new tax law, the amount you can deduct has increased — to 60 percent of your adjusted gross income, up from 50 percent.
2. Increasing stock market exposure, managing capital gains
The wealthy like to invest in stocks because when it comes time to sell, the taxes are typically lower than the rates on wage income — if, that is, the equity was held for more than a year. Long-term capital gains tax rates are zero, 15 percent and 20 percent for 2019, depending on your income.
Another strategy can be tax-loss harvesting. For example, there tends to be a “flurry of activity” at the end the year, with people trying to take losses to offset some of the gains they reaped earlier in the year.
3. Managing assets like a business
One way to save on taxes is creating a structure — such as a limited liability company, or LLC — to manage multiple investments, said Featherngill. It could include portfolio assets, real estate or a business.
While it could get complex, there may be opportunities to save money while at the same time creating a governance structure for your assets.
4. Estate and gift exemptions
Gift and estate deductions help bring down taxable income. Thanks to the new tax law, the deductions have been temporarily doubled. Individuals can now claim up to $11.18 million in 2018, compared to the $5.29 million limit per person in 2017. The exemption expires after the end of 2025, so the wealthy are taking advantage, said Featherngill.
5. Defined-benefit plan
A defined-benefit plan, similar to an old-fashioned pension, allows business owners to contribute a substantial amount of money towards retirement. It can be appealing to the rich because of the amount of money that can be put aside tax-deferred. However, defined benefit plans won’t work for every high-income business owner. They are highly complex and more expensive to administer. A SEP IRA, SIMPLE IRA, or 401(k) could be a cheaper and more effective way to save and reduce your tax bill.
Article summarized by Matt Ward