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As we climb the career ladder, our income goes up as well. And while your account balance increases, you sometimes tend to be under the influence of unknown anxiety – how much taxes would I have to pay this year?
However, many are not aware of the number of ways that would help them in minimizing their taxes. They hardly have the information about the various categorizations that are available to segregate their income and expenses into which workto lower their effective tax rate.
Here is a quick walkthrough of these strategies by one of Best financial advisors in Los Angeles to help you handle things smartly!
Ways to manage paying lower taxes
Exemptions for estates and gifts
Gift and estate deductions reduce taxable income, but there is even more reason to use them now.
Deductions have been temporarily doubled because of the new tax law. Individuals can now claim up to $11.18 million, up from the previous limit of $5.29 million per person in 2017. The exemption is set to expire at the end of 2025, so the wealthy are taking advantage, according to Featherngill.
You may have long-term trusts that pass down the wealth from one generation to the other. While it is subject to income taxes along the way, if it meets the limit, it will not be taxed as a gift and will not be subject to estate tax when the money is distributed.
A defined-benefit plan
Remember the traditional pension system. You are still certainly more inclined towards that. A defined-benefit plan is quite similar to that age-old thing that allows business owners to put money aside for retirement.
Carson stated that contributions to a defined benefit plan “will help bring down the individual’s taxable income, reducing their taxes for the current year.” It may also cause them to fall below the thresholds “in order to qualify for the 20% deduction.”
Defined benefit plans, on the other hand, will not work for every high-income business owner. You must determine whether it meets your retirement savings and business operational requirements.
Increasing equity exposure and profit management
The wealthy prefer to invest in stocks because, when the time comes to sell, the taxes are usually lower than the rates on wage income — assuming the equity was held for more than a year. They can also afford to take on greater risks.
According to Feather gill, the wealthy also seek to manage capital gains and losses for tax purposes.
For example, at the end of the year, there is a lot of buzz and activity around the people who try to take losses to offset some of the gains they made earlier in the year.
Donations to charities
Giving money to non-profit organizations has long been used by the wealthy to get a tax break. Furthermore, under the new tax law, the amount you can deduct has been increased to 60% of your adjusted gross income, up from 50%.
Of course, the average taxpayer can deduct charitable contributions as well — but they face a higher hurdle. They must itemize their taxes to do so. The Tax Cuts and Jobs Act nearly doubled the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly in 2018, requiring itemized deductions to exceed those amounts.