First things first, it’s important to be aware of the upcoming changes to your tax liability under Biden’s tax proposal.

It’s no secret that the new administration is planning to increase the top individual tax rate to 39.6%, in addition to:

• Elimination of preferential capital gain rates for taxpayers with taxable income in excess of $1M
• Elimination of like-kind exchange for gains exceeding $500,000
• Increase corporate taxes from 21% to 28%
• Reduce the estate gift tax exemption from $11.7M to $3.5M ($7M for married couples)

Note: As soon as the new tax proposal is written into law, we will make changes to update the blog post here.

In preparation for the tax changes, we’ve come up with a few ways for you to plan and minimize your legal tax liability.

The first way to keep more of what you make is to change the character of your income. If you own a business, we recommend restructuring your business from sole proprietorship or LLC to an S-Corp or C-Corp in order to legally owe less money in taxes.

How should you restructure? That will depend entirely on your unique situation.

While taxes for a C-Corp are lower at the top than for other business structures, there is a 20% deduction of business income for pass-through entities that may make more sense to consider. Hiring your children is a good practice. Remember, wages paid to child under 18 are not subject to FICA taxes (social security and Medicare taxes).

It’s important to work with an accountant to figure out the best way to structure your business in the most favorable way for your unique situation.

If you have recently inherited property from family or someone else, it may make sense to sell the real estate quickly in order to save money on incurring property taxes. 

Here’s why.

If your parents bought the property for $100,000 and it is now worth $500,000, they would have paid capital gains tax on the difference ($400,000) if they had sold it while they were alive.

Now if you hold onto it, you’ll have a stepped-up tax basis of $500,000 and will be required to pay property taxes on that amount ongoing, significantly limiting your potential gain from the inheritance. 

We recommend two options: you can either sell the home quickly after inheriting it in order to save money on property taxes or avoid capital gains tax by rolling the income from the sale into another real estate investment within 180 days. For more information on avoiding capital gains tax, you can check out the Forbes article here.

In a similar tactic, you may want to consider gifting your appreciated assets – instead of giving cash or checks – to nonprofit organizations. 

Why?

The clever but rarely used strategy allows you to gift a qualified charitable organization the full value of the appreciated asset’s current market value, while simultaneously saving on capital gains taxes by up to 20% of the appreciation. You may also be able to deduct more than what you paid for the asset. 

Rather than using cash, consider gifting qualified assets such as real estate, common stock, or other securities in order to preserve cash flow and maximize tax efficiency.

We talk more about this strategy in our youtube video Ways to Reduce Taxes for High-Income Earners here.

The last tip we have for reducing taxes for high-income earners involves setting up what’s known as a donor-advised fund.

In our last tip, we mentioned that donating money – or assets – to charity offers the opportunity for a tax deduction in the same calendar year that the donation is made.

However, you may not know that you can deduct several year’s worth of contributions by setting up a donor-advised fund.

A donor-advised fund is a charitable fund that you can set up to allow you to decide how and when to allocate funds to charity.

Essentially, you can make contributions this year, yet take the full tax deductions for several years on your tax return in order to reduce your tax bill. Going forward, you can decide how much money to donate per year and where to donate it.

This is a recommended strategy for those with higher incomes due to inheritance or windfall. Speak with your accountant to understand if a donor-advised fund makes sense for your unique situation.

Four unique strategies for high-income earners to use in order to reduce taxable income this year.

The best part is that these four strategies are just the tip of the iceberg when it comes to things you can do to reduce your legal tax liability.

Stay tuned for part II in the upcoming weeks where we’ll cover more complex strategies such as the invest-borrow-die strategy in order to help you keep even more of the money you make this year.

In the meantime, we’re always here to help. If you have a tax strategy question or need the advice of an experienced CPA, you can book a complimentary call with our team at any time.

Simply head over to our Get in Touch page in order to book your first appointment. 

Until next time!