How to Reduce Taxes…Winning the Long Game.

By Brian Seay, CFA

Founding Partner, Capital Stewards

My favorite tax adage is that you should pay everything you owe; but owe as little as possible.

Reducing taxes has always been a long-term game. With the passage of the Tax Cuts and Jobs Act, also known at the Trump Tax Cuts, that notion was solidified. Now, according to the IRS, only ~10% of taxpayers itemize deductions. Itemized deductions may help real estate investors or business owners, but many higher income earners will find that their options are limited. Instead of looking for deductions at tax time, planning with your Huntsville financial advisor needs to start now.

Real Estate Tax Reduction

Notably, Real Estate investing is one tax reduction option. Properties can earn positive cash flow, but depreciation expenses may produce losses for tax purposes. However, Real estate is not a panacea. There is a $25,000 limit to the amount of real estate losses that can be used to offset other w-2 (most employer) income.

Retirement Account Tax Strategies

Since deductions are often limited, controlling income is the first goal of tax reduction. But it only works if you are deferring income from a high-income year to a low-income year. The most common approach is through retirement accounts. Standard 401k employee contributions enable you to contribute and defer $22,000 in income or more each year. For business owners, contributing to your own plan as an employee and employer may enable you to save and defer more than $61,000.

Heath Savings Accounts (HSAs) are often an under-utilized wealth management strategy. Often employees contribute what they spend each year to defer income. However, an HSA may allow you to invest over the long-term. Meaning you can max out contributions at $7,700 or more and invest unused funds to cover expenses when healthcare becomes very expensive later in life.  

Long-Term Tax Planning (Leverage A Financial Advisor)

However, simply kicking the can down the road has minimal, if any, real impact. That means working with your Huntsville financial advisor and tax advisor to project income out into the future and plan accordingly. It may even be beneficial to pay more in taxes now at a lower rate than to defer income to a later date when your income tax rate is higher. Expanded access to ROTH 401Ks and IRAs may help in these situations. Our wealth management team can help build a financial plan that devises a long-term income tax strategy.

Tax Strategies for huntsville Business Owners

Business owners often have unique opportunities to control their income. Most business owners already expense as many items as possible; so the opportunity is not in additional deductions or expenses. The tax planning opportunity lies in the structure of your business and personal assets. In some situations, a C-Corp, LLC or S-Corp may help reduce your tax bill. Each business is different and the most tax efficient solution is different. Decisions around business structures, personal retirement account contributions and income deferral strategies should be made together to deliver the greatest impact.

As you can see, reducing taxes for high income earners requires planning with your wealth management team over the long term. Our financial advisors work with your CPAs, attorney and other professionals to coordinate strategies to deliver after-tax value. If you would like to speak with a member of our wealth management team, schedule a call here.