Those with great wealth must carefully manage their tax obligations so they can preserve their assets and maximize cost savings. Fortunately, there are many tax deductions available to everyone, including ultra-high-net-worth (UHNW) individuals; it’s just a matter of finding and claiming applicable ones with the assistance of a trusted financial advisor. Taking advantage of appropriate deductions can potentially reduce one’s tax burden while ensuring compliance with IRS regulations and lowering or eliminating the stress that is frequently associated with taxes.
This article discusses five tax deductions that can, in the right circumstances, positively impact one’s bottom line. Read on to learn more.
The super-wealthy and others may be able to claim a deduction on their federal taxes if they donate to a qualifying organization, such as a nonprofit, foundation, or charity. Since these are usually high-value contributions that have accumulated over time, the taxpayer will sometimes see a sizeable reduction in their taxable income. Taking advantage of this particular deduction is beneficial not only because of its potential financial reward but also because it enables philanthropists to support the causes they believe in and create positive social change.
Another option for everyone, including the ultra-wealthy, is to deduct their property taxes. In this case, when an individual files their taxes, they can itemize their local and state real estate taxes and mortgage interest. Property taxes can add up quickly for those who own high-valued real estate, so this type of deduction has the potential to substantially reduce a yearly income tax bill. Consulting with a financial advisor will help high-income earners maximize their itemized deductions and potentially lower their taxable income.
Depreciation refers to a decrease in the value of assets over time due to wear and tear, age, or obsolescence. The timing and assignment of this deduction can vary depending on asset type, but it still has the potential to be an important part of the tax equation for those UHNW individuals who own rental properties or businesses. Although it may not be possible to capitalize on all available depreciation benefits, even small changes can lead to a significant amount of savings for those in this income bracket. By using some well-considered strategies, real estate investors and other ultra-high-net-worth individuals might benefit from deducting depreciation on their federal taxes.
Retirement Plan Contributions
People of all financial standings, including the ultra-wealthy, can also deduct retirement plan contributions. Many business owners and entrepreneurs are big fans of this deduction as it enables them to put money aside for retirement while potentially avoiding hefty taxes. Additionally, it's benefical for those who are self-employed or have high incomes as they can potentially save thousands of dollars each year based on the amount they can deduct. Knowing how to take advantage of this deduction and others helps ensure that wealthy individuals can keep their tax liability to a minimum.
Yet another way individuals can potentially maximize their ROI and reduce their overall taxable income is to deduct investment interest. Depending on how much one’s investments earn in interest, this might end up being a significant tax break. One should work with a financial advisor, however, to understand all the nuances and complexities that surround this particular deduction. For example, investment interest cannot exceed its corresponding income in any given year. When used correctly, this deduction can be an effective way to save on taxes.
Without a doubt, those with substantial wealth would be remiss not to consider taking advantage of tax deductions to reduce their annual taxable income. Deducting charitable donations, property taxes, depreciation, retirement plan contributions, and investment interest are just a few of the ways one can potentially reduce taxable income while remaining compliant with both state and federal laws. It can be complicated to navigate the many different deductions that are available, but this can be overcome with research and advice from qualified financial and tax advisors. Understanding which deductions apply to one’s specific situation is the key to achieving potentially significant tax savings every year.
Disclosure: Lincoln Financial Advisors Corp. and its representatives do not provide tax advice. You may want to consult a tax advisor regarding any tax information as it relates to your personal circumstances.