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.

<img src="warren-buffett.png" alt="Warren Buffett speaking about tax strategies">

Photo from CNBC Interview

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. Retirement plan

A retirement plan allows business owners to contribute an 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. A SEP IRA, SIMPLE IRA, or 401(k) are a few options to get started with, but there are eligibility rules, so make sure to do due diligence.

Article by Matt Ward, CFP^®

Financial Planning