What income tax planning steps can emerging high net worth individuals take as part of an effective financial and estate plan?
Tax Day passed recently and, for many taxpayers, it was not a happy occasion. This is especially true for the top 20 percent of earners who, according to a recent study by the Tax Policy Center, will be paying 84 percent of all 2014 income taxes collected.
In 2003, Fortune Magazine coined the term "HENRY" — "High Earners, Not Rich Yet"— to describe those who, despite having incomes between $250,000 and $500,000, have little left after the costs of housing, schools for their children, other living expenses and taxes.
In 2014, taxpayers earning between $261,000 and $615,000 paid 18.3 percent of all federal taxes collected, despite earning only 12.1 percent of all income. Those earning above $615,000 paid 45.7 percent of taxes collected, despite earning only 17.1 percent of all income.
The top bracket for single people earning $400,000 is now 39.5 percent and earners over $200,000 may also pay a 3.8 percent Medicare surtax on net investment income.
The data demonstrate how important it is for HENRYs to focus on reducing income taxes. Long-term estate planning must now also include finding ways to reduce or defer income taxes during one's most productive years.
Many tax planners suggest taking a multi-year approach and trying to gear deductions and deferrals to periods in which they will be most beneficial. Strategies include making the largest possible 401(k) contributions in certain years and shifting the sale dates of stock options to years in which high earners may have less income. Careful decisions must also be made about which investments to make using sheltered accounts, such as a traditional or Roth IRA, and which to own unsheltered.
Increases in estate tax exemptions may also mean that HENRYs may choose to keep some assets in the estate to give their heirs the benefit of a step-up in basis, instead of trying to transfer assets in their lifetime to the next generation.
Whether or not you are a HENRY, there are many short- and long-term wealth preservation strategies to consider, starting with income taxes.
Experienced Nevada business law and tax attorney Craig Stone can help you identify and implement the optimal income and estate tax plan for yourself and your family. For more information and guidance, call (877)905-0890 for a consultation today.