By Jason Epps, CFP®, CRPC®
Due to the pandemic and stimulus payments, the federal government’s tax filing season for individual earners will start on February 12, 2021, as opposed to beginning in late January as it has in past years. (1) That means that although it is delayed, tax season is still just around the corner.
While paying taxes can be anxiety-inducing, there are dozens of ways to mitigate your tax bill—particularly if you are a high-income earner. At KFA Private Wealth Group, we know how stressful tax season can be. Below we have outlined just a few of our most helpful strategies that you can employ year-around to help reduce your yearly tax bill.
Income Tax Deferral Strategies
Several investment strategies will allow you to defer taxes to reduce your tax liabilities for this current year. Of course, contributing to retirement plans, such as a 401(k), 403(b), or 457, are some of the more well-known tax deferral strategies. (2) 529 education plans and cash-value life insurance are also widely utilized by many of our clients.
Health savings accounts can also be a great tax-management strategy, as they offer triple tax savings. With HSAs, you can contribute pre-tax dollars, pay no taxes on earnings, and withdraw the money tax-free to pay for medical expenses. While HSAs are relatively common as well, many people are not using them to their fullest extent. (3) The 2021 IRS contribution limits for HSAs are $3,600 for individuals and $7,200 for families. If you are 55 or older, you may also be able to make catch-up contributions of $1,000 per year. (4)
If you own your own business, creating a defined-benefit plan for you and your employees could enable you to bring down your taxable income, which will reduce your taxes for that year. Defined-benefit plans allow business owners to invest a substantial amount of tax-deferrable funds in a retirement plan, beyond what is allowed in a typical 401(k).
This can be beneficial for people who are making a high salary and who want to move more money into a retirement account than the maximum allowable in other plans, such as a 401(k).
Donor-Advised Funds And Charitable Giving
Donor-advised funds are mechanisms for charitable giving that allow donors to make donations as frequently as they like and receive tax deductions from their donations. This strategy can greatly benefit individuals or families who are inclined to participate in charitable giving. Donations can be in the form of personal assets, such as cash, stock, or real estate, and will be placed in an account where it can be invested and grow tax-free. Contributors will receive the maximum tax deduction that the IRS allows.
It is also a good strategy for charitable givers to donate highly appreciated stock to minimize the donor’s capital gains liability. Such contributions can be donated directly to a charity or can be gifted through a DAF.
We all know that wage income earners pay a higher percentage of their income in taxes compared to those people who have invested their wealth. The highest income earner pays 37% of his or her income in federal income tax, while the highest tax rate for long-term capital gains is 20%. That’s why investing a good portion of your income and making your money work for you—instead of working for your money—is a wise plan.
But there are more ways to protect your wealth from taxes. Although it is not possible in retirement accounts, tax-loss harvesting is a beneficial tax strategy for managing your losses and capital gains with investments in non-qualified accounts. Tax-loss harvesting allows an individual to sell losing investments and buy a similar investment in the same sector. Additionally, the investor does not need to report the loss on this year’s taxes but is able to wait to report it until next year or even add it to previous years’ tax filings. (5)
This strategy may be helpful for individuals who receive a high portion of their income through commission or bonus in a particular year. If you know that you will receive a large portion of your income at the end of the year, consider asking your employer to delay the payment until January of the following year. This may prove beneficial if the payment will put you in a higher tax bracket and delaying the payment will keep you in a lower tax bracket this year.
This strategy is useful in very specific situations and can be most beneficial if you know that a portion of your income, such as a bonus or commission, will not be repeated in the next year.
We Can Help
Do you have questions about which tax reduction strategy would work for you? We’re here to help. Please email firstname.lastname@example.org or call 301-305-8875 to schedule an appointment so that we can assist you in finding more ways to save you money on your tax bill every year.
Jason Epps is vice president and private wealth advisor at KFA Private Wealth Group, a registered independent advisory firm founded on the premise of providing conflict-free financial and investment advice. With over 15 years of experience, Jason possesses the unique knowledge and expertise necessary to provide his clients with the most applicable and beneficial financial guidance that helps them find confidence in their financial future. Jason is a CERTIFIED FINANCIAL PLANNER™ (CFP®) practitioner and a Chartered Retirement Planning Counselor℠ (CRPC®) and believes that a financial plan is only as strong as the advisor’s understanding of the core values and beliefs of each client. He serves a diverse range of clients, from young accumulators to pre-retirees and retirees, including business owners and professionals in a variety of fields.
Jason is passionate about giving back to his community and volunteers with various organizations in the D.C. metro area. He also has coached youth travel and AAU basketball since 2009. When he’s not working, you can find Jason spending time with friends and family, traveling, trying out new restaurants, and cheering on local D.C. sports teams. To learn more about Jason, connect with him on LinkedIn.
KFA Private Wealth Group, LLC is a Federally Registered Investment Advisory Firm. Securities offered through Arete Wealth Management, LLC. Member FINRA/NFA/SIPC
The information in this article is for informational and educational purposes only. For tax advice, please consult a tax professional.