Let’s be honest – who doesn’t want to reduce their taxes? The good news is that there are numerous tax-reduction techniques available for high-income taxpayers if you happen to be in the higher tax bracket. You must, however, be persistent enough to explore options, get financially educated or simply seek the advice of a reputable tax expert who can help you put the tools into practice.
The latter we would say is actually highly recommended as it can be a full time job to keep up with the most recent tax planning techniques due to the regular changes in tax regulations and growing compliance requirements. This is especially true if you come from a ‘Western high tax country’.
Catching up with the most recent tax regulations can be difficult, even with a free checklist as a reference. But should you still be interested in a high-level overview, make sure to continue reading.
Taking advantage of all of your allowable tax deductions and credits
Tax deductions are costs that you can write off against your taxable income.
Also readily available are numerous tax credits that lower your taxable income. There are additional credits and deductions that can be applied to company income, but there are still plenty of possibilities available if you are a self-employed person.
Some deductions and credits have hollowing periods and are eliminated as wages increase, but others are not.
It is essential to identify this with your tax consultant who will be able to identify which deductions and credits you may be eligible to claim.
Max out Retirement Accounts
Let’s discuss retirement funds. One of the biggest advantages of pension saving is that you can pay into pension to reduce tax. Depending on what country you’re in some or all of the money you pay into a pension qualifies for tax relief, which provides an instant boost to your savings and helps the fund to grow faster than other kinds of investment. These pension contributions will also lower your tax liability each year because every cent you deposit into these accounts is not taxable until you take the funds from your account.
The upside to this is that your disposable income will be smaller. The outcome? Your tax rate will be reduced. This implies that the tax rate on the money you withdraw will be considerably lower than it would have been had you been required to pay taxes on the money’s receipt. By making the maximum contribution, you can benefit from retirement accounts’ tax-saving features.
Restructure Your Business Entity
By incorporating a business, you can select a tax structure that will benefit you financially. You’d be surprised how many people forget about their current business structure and simply run things the way they’ve always done them until usually a tax expert points out to them that they could have been in a different business structure all along and saved thousands of dollars in tax money. It will obviously all depend on what type of business you have, how many employees you got, who manages and operates the business so, be sure to speak to an expert.
Make Donations for Charity
You are already aware that donating to a charity entitles you to a tax deduction for the year in which the donation is given. But did you also know that you can get really creative when it comes to actually eliminating capital gains taxes due on land, property or even shares that are given to charity?
It obviously depends on the tax rules in your own country but even companies can make charitable donations and hence reduce their taxable income. A donation doesn’t necessarily only have to be money. It could also be land, property or shares, or even items or equipments that the company sells.
Tax Residency Planning
Rich investors typically own a number of buildings, businesses, and properties stretched out over many areas. If you don’t prepare ahead of time, this could expose you to dual taxation issues. Even if you don’t live in all of the places you’ve got assets in the mere fact of owning businesses and properties around different places might trigger a tax obligation.
Depending on what your tax bill is it might be worth it considering relocating elsewhere where the taxes are lower. This doesn’t necessarily mean that you have to leave the country but it could even just mean relocating to a state / municipality with lower income taxes.
If you’re looking for places in Europe where the taxes are low make sure to check out our previous blog post where we’ve listed 9 low-tax countries.
Benefit From Non-taxable Income
Some forms of income are not taxable, thus if you receive one of those forms of income, it is tax-free. For instance, revenue from a life insurance policy can be tax free, even certain distributions made from investment accounts will not only allow your money to grow tax-free but you may also make tax-free withdrawals. And lastly, there are lots of capital gain tax exemptions that will either reduce or fully eliminate your tax liability.
Tax Loss Harvesting
When it comes to your investment portfolio, the word “loss” doesn’t have to feature in your vocabulary. Instead it offers an opportunity to lower your taxable investment earnings. The objective behind tax-loss harvesting is to use these losses to offset any investment earnings in regular income on your tax return in order to reduce your tax liability while keeping your asset allocation ideal.
You might have previously suffered losses in sell-offs and been burned. Harvesting tax losses is not the same as taking a loss and never having a chance to make it up. Maintaining market exposure AND lowering your tax liability on realized gains in other parts of your portfolio are both achieved by selling an asset at a loss and exchanging it with a comparable security.
Shoot for Long-Term Capital Gains
Investing can be a useful technique for increasing income. The advantageous tax treatment for long-term investment income is another advantage of investing in stocks, managed funds, commodities, and property investments.
Based on their income level, investors who hold capital assets for a longer period of time will attract a more favorable tax rate on their investment income. Typically if the asset is held only for a short amount of time then the capital gain is taxed at regular income levels. Increasing wealth requires knowledge of capital gains’ long-term vs. short-term rates and the conditions attached to qualify for them.
Claim Tax Credits
Tax credits are sums of money that taxpayers can immediately deduct from their tax liabilities. Tax credits lower the actual amount of tax owed, as opposed to deductions, which reduce the taxable income amount. The amount of a tax credit varies on its category; some tax credits are only given to people or businesses in particular regions, classes, or industries.
Get Private Health Insurance
In certain countries getting a private health insurance will lower your tax bill. How would that work? You will not be taxed when you make withdrawals for medical expenses from your health savings account since the money you contribute is free from income taxes.
Keep in mind that the requirements for this withdrawals to be income tax free are quite stringent. So, best to also check with your insurer. Top earners often transfer a percentage of their pre-tax earnings into their accounts. This enables them to successfully hand their healthcare expenses and enable tax-free growth of their health insurance accounts. In many cases it also forms part of their retirement plan.
Negatively Gear an Investment Property
Why would you invest in something that loses money yearly? There are two reasons why. First, a property with a good location may appreciate in value through time, resulting in a capital appreciation. Second, the yearly loss is typically compensable by other income, such as salary or wages. Negative gearing, however, is not a secret to increasing income. Consider the various hazards before maximizing negative gearing.
If your investment is negatively geared, it loses money every year. By deducting this loss from your income, you can pay less tax on other types of income. This may not cover all of your losses; it may only cover up to 45%, depending on your income tax. You pay for the balance out of your own wallet. Additionally, if the property is vacant for extended periods of time, you may need to be sure your cash flow can meet expenses.
Obviously, this is just a high-level overview of the different techniques that are available. However, these techniques require an in-depth understanding on how they can be applied in practice. Further, it’s crucial to remember that the tax system is always evolving. Therefore, what is successful this year could not be successful, or even conceivable, in 5 years. You may prevent losing out on savings opportunities by routinely checking your tax obligations and making sure that you work together with a knowledgeable expert.
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