Tax reduction is one of the many ways we help clients get more out of their financial resources, and it can result in significant benefits. We recently held our annual Year-End Tax Strategies workshop, which covers the top 10 strategies that we have seen make an impact on our clients’ lives.
Filing tax returns accurately is important. But we have found there to be incredible power when the financial plan goes beyond the process of filing tax returns, to planning far ahead. Our goal with all of our tax workshops is to motivate our clients to take a relatively small amount of time now to develop a forward-looking plan, in order to create significantly more freedom for themselves in the coming years.
A “Progressive” Tax System
America has a progressive tax system, where the intent is that the more money you make, the higher your tax rate. But over the past several decades we’ve seen a shift, which in recent years has turned into a full flip: billionaires are now paying a lower tax rate than the middle class. When you take into account federal, state and local taxes, those ultra-wealthy households pay a total rate of about 23%, versus 24% for the working class. 1 But how does this happen in a progressive tax system, where billionaires pay a lower tax rate than the working class?
The Importance of Income Diversification
At the center of what these wealthy families take advantage of is income diversification. There are different types of income sources that are taxed differently in the tax code. The most common type is work income, or income that comes from a job (W2, 1099, Schedule C income). This is called “ordinary income”—yet despite being the most common, it’s also the most expensive, as it has the highest tax brackets applied to it in the entire tax code. We’re talking upwards of 50% when accounting for federal, state,
Social Security, and Medicare taxes.
Ultra-wealthy families often hire highly paid tax consultants to navigate the code, and the key idea many of them leverage is the other types/sources of income that are taxed at lower rates. This allows them to structure their tax returns so the bulk of their income does not come from wages, unlike most individuals. Instead, the majority of billionaires’ income comes from other sources, like investments (stocks, bonds, real estate, business interests)—all of which typically enjoy a lower tax rate than income from a job. To put it simply, they diversify their income. This planning construct is absolutely fundamental for someone that wants to meaningfully help reduce their taxes—and the good news is that with the proper guidance and planning, many of the techniques they use are available to most successful families as well.
Learn Our Top Tax Reduction Strategies
If you’d like to learn about the proactive strategies that have driven the biggest positive outcomes for our clients, we’re hosting another session of this workshop on Friday, November 13. Click here to learn more & RSVP for the free virtual event on our website now. Because it’s not about how much income or assets you have—but how much you can keep after taxes.
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