Tax Planning for Those of Us with Higher Income Levels
Being a higher-income earner can be tantamount to being a high-income taxpayer. Not only that, the tax ladder gets steeper as you earn more. Still, taxes shouldn’t be a barrier to enjoying and growing your hard-earned money. You may be able to significantly lower your taxes by employing tax-efficient strategies and planning.
Be Strategic About Timing
It’s important to note that taxes such as the net investment income tax and the Medicare surtax, as well as exclusions from personal and itemized deductions, are based on your adjusted gross income (AGI). Thus it’s vital to proactively manage your AGI.
The timing and scheduling of tax payments and collections directly affect your AGI. This can go up depending on the earnings you will include, and it can go down depending on the expenses you will append. For business owners, a good general rule of thumb is to review deductions for the year and apply them as soon as possible. You can also fast-track your payments for business expenses before the year ends. Assuming you are using cash accounting, another option is to defer your collection of payments for the following year. We also regularly see the adoption of a multiyear approach to avoid increasing your income significantly for any given year. Discuss this with your tax team so you can consider both the short- and long-term ramifications. Looking ahead can also help in strategically applying deductions and depreciation for future years when they may be especially needed.
Give to Charity
Aside from spreading goodwill, donating to charity has tax benefits. For example, your annual cash donations to public charities can be deducted up to 50% of your AGI, while capital gain property donations held for more than a year, such as stocks, bonds and mutual funds, can be deducted up to 30% of AGI. If you’re donating to a private foundation, these limits are reduced to 30% and 20% respectively. If you anticipate a large increase in income for a particular year and would like to offset it by donating to a good cause, you may want to consider a donor-advised fund, especially if you’re still undecided about your fund’s recipient. A donor-advised fund allows you to make a tax deduction on the donation immediately but defer donating the money until you’ve determined the charities you want to give it to.
Claim for Bonus Depreciation
Bonus depreciation is a tax provision that allows you to depreciate or deduct the cost of qualified tangible personal and business property. For example, say you made a renovation on an investment commercial property. You would have a 50% bonus depreciation from 2015 to 2017. By 2018, the depreciation would decrease to 40%, and by 2019 it would decrease to 30%. If you’re planning to make a sizable purchase, you can use the bonus depreciation benefit for your taxes that year and in succeeding years.
Utilize a Health Savings Account
High-income earners often opt for opening health savings accounts (HSAs) because they provide triple tax benefits: Contributions are tax deductible, the earnings grow tax-free, and qualified withdrawals are also tax-free. To open an HSA, you must have a high-deductible health plan amounting to $1,300 per individual or $2,600 per family. For 2016, you can deposit up to $3,350 as an individual and $6,750 as a family in your HSA, and the amount is tax deductible for the current year. Withdrawals are not taxed, either, as long as they are qualifying expenses, such as prescriptions, consultations, and dental or vision care. Consult with your financial planner on the best financial institution that offer HSAs.
Keeping up with the ins and outs of the tax system in relation to your earnings can help you save more of your hard-earned income. Before implementing any tax strategy, please consult a qualified Certified Public Accountant (CPA). By working closely with your financial advisor and your CPA, you can employ smart strategies to make tax rules work for you.