If you happen to be in the upper strata of tax brackets, it's hard to find reliable and relevant information in the media. Much of the financial media is geared toward the middle class and frequently recommends courses of action that may be irrelevant to you. For example, advice to maximize your tax deductions by contributing to an IRA doesn't make much sense for those who make too much money to qualify for an IRA contribution tax deduction. There are, however, some moves that may help high-earning, high-net worth taxpayers manage their tax exposure and maximize after-tax income and the legacy available to pass on to their heirs.
Understand the AMT
The alternative minimum tax, or AMT, strips away certain deductions and exemptions for those in higher tax brackets. Meet with a tax adviser several months prior to year end to start taking steps necessary to manage AMT exposure. For example, you may want to do an elective disqualification of certain stock options, try to bunch your deductions into a non-AMT year or look for a way to claim a net operating loss. You may be able to use as much as 90 percent of a net operating loss to offset AMT income.
Move Assets Out of Your Estate
Assets held in your own name when you die over and above a $5 million threshold incur a 35 percent estate tax under current law. Try to move assets out of your name, via a strategic gifting program. For example, you can give up to $13,000 per year to any given individual tax-free, subject to certain lifetime exemptions. You can also set up a charitable giving program. Or you may move assets into an irrevocable trust for your benefit or the benefit of your family, heirs or favorite charity.
Life Insurance Planning
Cash value life insurance may offer a way for the affluent and wealthy to accumulate significant assets on a tax-advantaged basis. The death benefit from a life insurance policy is tax-free, and cash value in a life insurance policy also grows tax-free. You can access the money via policy loans tax-free as well. The tax on the accumulation of assets in a life insurance policy is similar to a Roth IRA, but you are not restricted to contribution a maximum of $5,000 per year. In fact, by keeping your permanent death benefit relatively low, you may be able to contribute very significant amounts to this plan and then turn the cash value into a supplemental income stream or ready means of financing later in life.
Harvest Capital Losses
Be alert for opportunities to sell losses to offset taxable capital gains -- a tax-planning technique known as "tax-loss harvesting." This allows you "cancel out" taxable capital gains, provided you sell other assets at a loss in the same tax year. Just be observant of "wash-sale" rules: If you sell an asset and claim a capital loss, you cannot repurchase that asset or a substantially similar asset for at least 30 days.
Traps and Pitfalls
Do not rely on offshore strategies to lower your taxes. U.S. law requires you to declare income taxes on income "from whatever source derived," including offshore sources. Failure to declare this income and pay taxes on it could lead to charges of tax evasion.
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