Tax Tips For High Wage Earners

Tax planning for high wage earners is better done looking ahead three or five years, according to a recent post on cnbc.com,

If you see a trend, such as an increase or reduction in income, you can alter your deductions or deferrals.

Leverage income-producers

To avoid adding to your tax burden, make sure to leverage some income-producing investments, like bonds and real estate investment trusts, as well as tax-sheltered accounts—including 401(k) plans and IRAs. But this investment income is taxed as ordinary income and could bump you into the higher categories if you’re right on the edge of the line.

However, if you place it in a retirement account, there’s no tax owed until the funds are withdrawn, and in the case of Roth IRAs, no tax will ever be owed after the contributions are made.

Keep it close to home?

A higher estate tax exemption means that fewer people pay the federal estate tax now, and some experts are reconsidering their traditional advice. A former rule of thumb held that you should give away as much as you can during your lifetime; however, nowadays, there can be some real advantages in keeping things in your estate.

In retaining appreciating assets inside the estate, heirs would have the opportunity to get a stepped-up in basis when they inherit. For instance, if a stock grows from $100 to $1,000 during a person’s lifetime, the clock will reset for heirs when they inherit it. When the heir sells the stock, his or her cost basis is determined as of the date they inherited the assets (so they will not pay tax on the income from $100 to present—only from $1,000).

Seek counsel in Virginia

Each state has different rules about estate taxes, and you should talk to your estate planning attorney about this. It is also important to remember that not all beneficiaries of an estate actually live in the same state.

Reference: cnbc.com, “Tax planning tips for high-income earners”