Are you a business owner who despises paying what feels like all of your money away to a tax bill?
We hear this every day as we work with business owners. When we partner with you as your CPA, we take a holistic approach to reducing both your business and personal taxes with tax saving tips.
In this blog, we’ll focus on tax saving tips for high-income individuals. So if preserving your wealth is important to you, read on to learn more about these tax-saving tips for high-income individuals.
1. Give Just Enough Away in Gifts
Typically, inherited assets are taxed when they are paid to the beneficiaries of the estate. One way to help avoid this is through gifting. Now, you can’t just give any amount you want; there are limits. The limits for 2020 and 2021 are $15,000 per person per year. If you and your spouse want to gift something to someone that you both own, you can each gift up to $15,000 (or $30,000) total per year.
If you’re a beneficiary who’s already received money from an estate and are facing taxes, one option you have to reduce your taxes is to make a gift to a registered charity. Done properly, this can result in a tax-deductible donation.
Not to make your head spin, but then there’s also this thing called the Lifetime Gift Tax Exclusion. On top of the $15,000 annual exclusion, you get a lifetime exclusion $11.58 million (in 2020). For example, if you give your sister $100,000 this year, you’ll use up your $15,000 annual exclusion. You’ll also use up $85,000 of your lifetime exclusion. Luckily, you probably won’t owe any gift tax here. Why? Because the extra $85,000 ($100,000 – $15,000) simply counts against your $11.58 million lifetime exclusion.
2. Use Your Home to Reduce Your Taxes
A lesser-known tax saving strategy is based on something called the Augusta Rule. Named for the home of the Master’s golf tournament, the rule was established to protect homeowners who rented out their homes on a very limited basis (originally to Augusta, GA visitors watching the tournament). Essentially, the rule states that you can rent your home for up to 14 days per year without claiming that rent as income. So, how does this benefit your taxes?
Of course, if you live in a nice vacation spot or near a popular tourist destination, you could always bring in some tax-free income by renting your home out. However, there’s another option to cut your taxes and protect your wealth with the Augusta Rule. You can rent your home tax free, not only to vacationers but also to your own business. Your business entity can rent your home for off-site staff meetings, retreats, etc., and fully deduct the business expense, thereby reducing your taxable income without increasing your personal taxes.
Now there are some steps you’ll need to take in order to support this deduction, so make sure you consult a professional prior to doing so.
3. Reduce Your Taxes With Investments
Real estate is one of the most tax-advantaged investments around. If you want to build wealth while protecting it from excessive taxes, you should definitely consider investing in real estate.
The deductibility of real estate expenses like interest, property taxes, and depreciation can often offset the income for tax purposes, even while your equity in the investment grows. Depreciation can be a significant deduction, and since it exists only on paper (nothing out of pocket) you can actually show a tax-free positive cash flow from your investment. If this interests you or you already own real estate, you’ll want to read about cost segregation in our 5 Tax Strategies You Should Know About blog here.
The IRS regulations around real estate investment can be very complicated. It’s a response to abusive tax schemes which, unfortunately, impacts legitimate investors as well. You don’t want to miss out on the opportunities here, because real estate really is one of the most tax-advantaged investments available. At the same time, you don’t want to lose thousands when a deduction is disallowed due to passive/active loss rules like Section 469. It’s always best to work closely with an expert tax advisor to make sure your investment strategy is well planned.
Planning to minimize your taxes requires forethought and knowledge of the applicable tax laws. To learn more about how we can help you preserve your wealth, schedule a complimentary call today.