If you are paying 6 figures in taxes this year this is the perfect blog post for you.
First, let’s start off by saying you are very lucky to be in this position.
Many of my clients are in this position and they often get so caught up in the total dollars they are paying in taxes.
But you have to realize, this means you are making A TON of money. And when you make a ton of money, taxes are a part of the game.
Here are 6 things you need to understand:
When you are paying such a large dollar amount per year in taxes, the biggest alpha comes from tax planning.
You need to nail down and utilize any and all that apply to you:
To name a few.
When you tax bill is that high, there is normally a ton of room for great tax planning that can significantly reduce your tax burden over your lifetime. The key word here is lifetime.
The team around you makes a huge difference in how much tax you are going to pay in your lifetime.
Cheap professionals end up costing you a lot more in the long run.
You want to invest in a great financial planner, CPA, and estate planning attorney on your team to ensure you are taking advantage of all the best tax planning moves out there.
Invest in this team and keep them around for a long time once you find the right one.
This leads to smooth sailing once you find the right pieces. They will be worth way multiples of the cost you pay them.
They will also be the ones to stay on top of law changes to ensure you are always doing the best planning possible.
So often high income/high net worth individuals consider cheating the system.
Whether this is:
- writing off personal expenses
- taking real estate losses against their income (when not actively participating)
- paying too low of a reasonable salary
- abusing conservation easements
- etc.
Let me tell you, it is not worth it. People get away with it until they don’t.
You make way too much money to cheat the system and then have to worry every year that an audit may come.
One of the best tax planning tools you have is around timing income. Let’s say you are in your highest income earning years right now. Deferring income through 401(k)s, solo 401(k)s, deferred comp plans, etc. can be a game changer.
You may be able to reduce income at the top brackets and then convert those funds to Roth in lower brackets in early retirement, when you take a reduced role, after you sell your business, etc…
This can drastically reduce your lifetime tax bill. But you need a great plan around this.
A realization many can simply not accept is that when you making $500k-millions of dollars a year, you are going to pay tax. It is that simple.
There is no way to get around the system and pay no tax. No matter what you read on social media.
And that is okay. You are a great earner.
Utilize your tax planning options out there and then focus on making even more money. Your time is best spent there.
Social media raves about real estate. And I get it.
Real estate is an awesome asset class with:
It can be a great asset class even if you cannot use those losses against your active income. Way too many think they are doing this and getting around the system but are nowhere close to hitting material participation tests.
I am sorry… but you cannot run a business, be a doctor, etc. and get REPS status. You also can not utilize the short term rental loophole and not be the ones doing the work.
I've seen many people hire property managers then take these losses. It does not work this way.
At the end of the day, understand you are in an incredibly fortunate situation. You are killing it.
Do the best tax planning every year and move on.
Financial Advisor