How Top Bracket Earners Can Prevent Excessive Taxation

If your income places you in the top tax bracket, you’re in an enviable position by many people’s standards. But no one would envy your tax bill! Those who earn more than $400,000 annually (or $450,000 for couples filing a joint return) are hit with a shocking 39.6 percent federal income tax on their earnings. During tax time, the top income bracket isn’t the most fun place to be.

Of course, you should remember that your income is taxed after deductions are taken. So the key to reducing your tax liability is to investigate all possible methods of reducing your taxable income.

Tax-deferred or tax-free accounts can help. If you pay considerable taxes on investments, moving some of them to a special tax-free or tax-deferred account might help.

…but sometimes the opposite is true. It might seem counter-intuitive, but sometimes moving the right investments to taxable accounts can be helpful. For example, income from municipal bonds is currently exempt from taxes, holding those in a taxable account can be a smart idea. Passively-managed stock funds are often more tax efficient, and might also be held in a taxable account. The rule to remember is that you can never avoid taxes entirely, and that you should decide whether it is better to pay them now or pay them later when you retire.

Watch out for long-term capital gains. Selling a property or investment that you have held for more than a year will trigger long-term capital gains taxes. And since these taxes are calculated at up to 20 percent, as opposed to lower taxes on items owned less than a year, you would be wise to consider the timing of sales. Sometimes it is even beneficial to take a small loss in order to offset tax-heavy gains.

Work with a qualified financial advisor. It’s a common misconception that high-income earners don’t need financial advice. In fact, you probably need guidance even more than the average person, because you have more to lose in the event of a misstep. Call us for a consultation, and we can help you identify your risks and create a plan to prevent excess taxation.