One has to pay their taxes, whether they like it or not. Tax evasion is illegal and attracts hefty fines. At times, defaulters are sent to prison. On the other side, there are legitimate ways to minimize tax liability, which is essentially tax avoidance. But this isn’t child’s play. Unless you have organized your finances smartly, you won’t be able to save much on taxes.
HNWIs often find themselves at the sharp end of progressive taxation. The more they have, the more the cut is. And this can be painful. HNWIs can even end up witnessing a decline in their net worth. Thus, tax planning is imperative. How to do it? Here are a few suggestions to make:
- Charity Goes A Long Way
Have you ever noticed that HNWIs are quite active in charity? Now, before making careless assumptions, let me clarify. By being active in charity, they can be genuinely invested in helping the world. But, there do come certain tax benefits from the same.
We will focus on these benefits. Charitable donations up to a certain limit are eligible for deduction. These limits are applicable not only to individuals but also companies. Nevertheless, donations are useful in reducing tax liability and image building.
- Harvesting The Losses
Capital gains attract taxes and, at times, higher ones. The reason is you are selling an asset at a profit. And the profit is called capital gain. And governments levy tax on the same. HNWIs are involved in trading in securities, and capital gains tax is a serious liability.
To minimize these taxes, HNWIs may engage in tax loss harvesting. In this strategy, individuals sell underperforming securities, the losses incurred from which can be used to offset capital gains. You can seek deduction and reduce tax liability.
- Life Insurance
Estate planning is inseparable from financial management. But, with the transfer of estate comes estate taxes. The larger the estate, the larger the tax slab. And, it could be quite a burden upon the heirs to pay off the taxes.
One way to help them mitigate the tax burden is through life insurance. The death benefit passed on to heirs can be used to reduce or eliminate their estate tax liability.
It is best to consult with an advisor, choose the best life insurance policy, and pay the premium. You can even secure tax benefits from the high premium you pay.
- Plan for Retirement and Save on Taxes
In the United States, contributions to the Individual Retirement Account (IRA) are eligible for tax deduction up to a statutory limit. You’ll retire one day, or at least slow down. And, even if you don’t intend to retire, you’ll pay taxes forever as long as your money keeps growing.
It is best to start investing in these accounts as early as possible. You can claim deductions on these contributions. Sit with your advisor, and they will tell you the best way to optimize tax payments from these accounts.
- Hire an advisor
You must hire an advisor. All your money is spread across different places and assets. No matter how tax-savvy you are, you cannot single-handedly manage the vast universe of your personal assets. Moreover, there’s more to tax planning than knowing your assets and the tax slabs for them.
Let professionals do the work for you. You are an HNWI. As much as you earn, you pay as heavily in taxes. And these professionals can help greatly in cutting down on these taxes.
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