What You Need to Know for Maximum Tax Advantages

When it comes to paying taxes, most people would rather pay less than more. However, despite this fact, a large percentage of people never take the time to learn how to reduce their tax obligations.

Knowing the ins and outs of the tax code and the strategies that you can use to reduce your overall tax burden can be highly beneficial for you. People who are high-net-worth individuals especially need to know how to pay fewer taxes because they stand to lose more money to Uncle Sam by not knowing this information.

In this article, we will break down the top things that you need to know for maximum tax advantages. (Note: I am NOT a certified financial advisor or tax expert.)

Income Tax Deferral Investment Vehicles

Income tax deferral investment vehicles are investment vehicles that shelter your taxes from current taxation and defer the taxation to a later date. There are several reasons why these investment vehicles are beneficial from a tax standpoint. First, they can reduce your current year tax obligations. Second, they can help your returns to compound faster since they reduce current tax obligations and larger amounts of money can stay in the asset to aid compounding.

Popular income tax deferral investment vehicles include:

• Cash-Value Life Insurance

With cash-value life insurance, you make contributions with after-tax dollars. The money that you invest can grow tax-free. You are allowed to make withdrawals up to the premium amounts paid without being taxed. These investment vehicles are very popular among high-net-worth individuals because they allow for higher limits regarding the amount of money that can be invested each year.

• Qualified Retirement Plans

These include 401(k)s, 403(b)s, and 457 plans. Using one of these investment vehicles is one of the best ways to defer investment income. The SECURE Act of 2019 allows people over the age of 50 with high incomes to save up to $26,000 per year in a 401(k). This can allow for greater control over when you retire. People who use these tax deferment investment vehicles won’t be taxed on dividends, interest, or capital gains from the accounts until they start taking distributions during retirement.

• 529 Plans for Education

These plans require you to pay federal taxes on your contributions. But, the money grows tax-free. Also, distributions that you receive and spend on qualifying education-related expenses are not taxed. There are no contribution limits for these types of accounts. But, any contribution that is above $15,000 per donor per beneficiary count against the lifetime estate and gift tax exemption.

Timing Capital Gains and Losses

Generally speaking, long-term capital gains (gains that occurred over at least one year) are taxed more favorably than their short-term alternatives. So, if it’s possible, you should try to wait for at least one year before realizing various forms of capital gains.

If you experience capital losses, then you should use a strategy called “tax loss harvesting” to get deductions for your losses. The IRS allows you to deduct up to $3,000 in losses against regular income in 2021. You can also offset your losses with current and future year capital gains. Additionally, you can carry over losses not used in the current year to future years.

Another tax reduction strategy that involves timing is using a “Qualified Opportunity Fund.” A qualified opportunity fund (QOF) is a fund that allows you to defer capital gains taxes for up to five years by investing in a QOF within 180 days of the sale of the capital that you experienced a gain on.

Income Deferral

Income deferral is the process of deferring your income into the next year in order to reduce tax obligations for this year. This is not always possible, especially for people who only receive a salary that is evenly paid every month. But, for workers who receive commissions or other similar types of payments, it might be possible for you to defer certain commissions into the following year if they occur at the end of the year. Deferring some of your income into the following year reduces your current-year tax obligations and could potentially even bring you into a lower income tax bracket, which could also help you save money on taxes. You will have to account for the income in the following year, however.

Mortgage Interest Deductions

This is one tax advantage that is available to homeowners. In 2021, up to $750,000 in principal that is financed can have mortgage interest deducted from it. If you are currently renting and are thinking about buying a home, then this is one good reason to pull the trigger on buying a home.

Medical Expense Deductions

A new tax rule for 2021 is that medical expenses that exceed 7.5% of your adjusted gross income (AGI) can be deducted as an itemized expense. So, if you are paying a lot of money in medical costs throughout the year, you may qualify for this deduction. You should keep careful track of your medical expenses in order to tell what percentage of your AGI your medical expenses are. Even if you are currently in good health, it is still a good idea to keep this on your radar.

Conclusion

Knowing how to save money in taxes and how to implement strategies that reduce your tax burdens is something that can help you in the long run. Many high-net-worth individuals employ accountants to help them find every possible dollar that they can save in taxes. If you are already doing this, then that’s great.

However, whether or not you have an accountant scanning your financial statements to look for tax savings or not, being aware of all of the strategies above can help you significantly. Unfortunately, many people over-pay their taxes every year. This is mostly because they are unaware of how to reduce their tax obligations. You can avoid being one of these people by implementing some of the strategies mentioned above and by keeping up to date on the latest changes to the tax code.

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About the Author

Ellie is the founder of Blue Lake Capital, a commercial real estate investment firm specialized in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.

A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.

Ellie is the host of REady2Scale, a podcast that highlights honest, insightful, and thought-provoking discussions on the multiple approaches for successful real estate investing.

She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.

Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.

You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.