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Important Tax Savings Strategies for the Affluent – And Those Who Want to Be

May 19, 2021

When I worked as a tax CPA for KPMG in the late 90s, I served many corporate executives and wealthy families as their senior tax specialist and prepared many individual income tax returns, trust returns, and gift tax returns. Now, I use that knowledge and expertise to help my affluent and high-income clients plan ahead to keep more money in their pockets by using smart tax savings strategies. 

Looking at this Historical Tax Rate Chart 1913-2021, you can see that the current top income rate is relatively low. Like the importance of diversification in investing, I believe that tax diversification is just as relevant as you plan for your financial future.

I have five tax savings strategies I’d like to share with you today to help you keep more of your money.

Tax Savings Strategy #1: Diversify Your Income Sources

Investors should consider owning investments in three tax buckets:

  • · Tax-deferred  - 401(k) or IRA
  • · Tax-free  - Roth IRA or HSA
  • · Taxable - individual, joint, revocable living trust

The tax treatments are different in each of the three buckets before withdrawal. You can sell investments with gains or losses inside the tax-deferred bucket and tax-free bucket without reporting them to the IRS. However, you must watch for short-term or long-term capital gains, interest income, or dividend income each year inside the taxable bucket.

Since you cannot predict your future income tax rates, owning investments in all three tax buckets allows you to have the maximum tax planning flexibility during retirement to reduce taxes. For example, if our government’s deficit continues to be large, the tax rates may increase during your retirement for people earning over $200,000 annual taxable income. You may be able to withdraw money from your Roth IRA (tax-free bucket) instead of your IRA (tax-deferred bucket) to keep your taxable income below $200,000, therefore paying taxes at a lower rate. When tax rates go down because of a change in government (i.e., a new president or congress), then you can switch to withdrawing from your IRA and taxable accounts.

Tax Savings Strategy #2: Help Your Children Fund Their Roth IRAs

If your children have a part-time job or a summer job, earning any amount of income, you should encourage them to open a Roth IRA now, which you can help them fund up to their earned income, with a maximum of $6,000 for 2021. Even if they only make $4,000 a year and may only be able to save $2,000 for the Roth IRA, you can help with another $4,000 to encourage saving now and investing for their retirement early. The long-term growth of this tax-free account is significant. You can teach them the magic of compounding over 50 years, and they won’t have to pay taxes on distributions regardless of their income level.

SEE ALSO: Six Tax-Efficient Investing Strategies

For the young people who are just starting in their career and their income is low enough to be eligible to contribute to a Roth IRA, generally, I recommend maximizing Roth IRAs after they have contributed enough to get all the employer matching in their 401(k) plan – don’t leave money on the table.

Tax Savings Strategy #3: Get Creative with Your Charitable Giving

Suppose you have appreciated stocks in your non-retirement accounts. Instead of writing checks to charities or using payroll deductions at work, you can simply set up a donor-advised fund through your financial advisor and transfer the appreciated stocks that you have unrealized to this fund. You can deduct the fair market value as charitable deductions on tax returns in the year of funding the donor-advised fund, even though you don’t have to determine the recipients of your generosity until years later.

For example, if you usually give $5,000 to charities by writing checks, you can donate a total of $100,000 value of appreciated stocks (with a cost basis of $60,000) to your donor-advised fund, and you can save about $40,000 in income taxes that same year. Then, when you sell the stocks to diversify to other investments inside the account, you don’t have to report the long-term gains of $40,000 on your tax returns, saving you an additional $12,000 in capital gains tax. If this account grows, you will have more money to help charities, and you can decide to choose the amounts and the charities during your lifetime.

Note: You do not take another charitable deduction when the money (grant) goes to charities from this account. Upon your death, the successors you have named will continue your legacy.

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