Taxes can make anyone’s head spin. But people who have multiple income streams, investments, or otherwise complex financial situations have complex tax liabilities to deal with that most people have never even heard of. From the alternative minimum tax (AMT) to taxes on investment income, the tax rules get really tricky for high net worth individuals.
Here are a few of those complex tax liabilities and how they impact your wealth, especially when they are not properly addressed with an experienced tax planner.
One mind-bending tax is the “alternative minimum tax” or AMT. With this tax, you have to calculate everything twice- once under the normal rules and then again under the AMT rules. You then must pay the higher of the two amounts. You pay whichever total is bigger. Because of the complicated math, many families end up owing more tax than they expected with AMT.
Another tax headache comes from investment earnings. Individuals making over $200,000 per year or couples over $250,000 pay an extra 3.8% tax on top of taxes on investment earnings like stock sales, bond interest, dividends from companies, and rental income. There are also complex rules about what rental expenses you can deduct.
Some industries, like investment management, have their own tax rules, too. Ever heard of “carried interest”? It’s bonus profits that venture capital, private equity, and hedge fund partners get based on their returns. Right now, this income is taxed at low rates meant for long-term investments. But this tax break “loophole” could go away, complicating things for investment pros.
Estate taxes when inheriting money and the evolving rules around cryptocurrency are other areas with complex taxes for high net worth individuals.
As you can see, high net worth individuals deal with intricately complex tax situations that most ordinary taxpayers never need to think twice about. But complexity breeds high tax liability when not addressed properly.
Making reactive moves close to tax time by harvesting some losses or bunching charitable contributions often won't be enough to materially minimize taxes owed given the obscurity and intricacy of these rules.
That's why effective tax planning needs to start early and consider the implications of these complex situations when making financial decisions. For instance, an experienced tax advisor can recommend setting up a trust or gifting assets to heirs at lower valuations to reduce estate and gift taxes down the road. Or they may advise a taxpayer to convert a vacation property to a rental to take advantage of passive activity loss rules.
Catching capital losses in downturns, maximizing retirement plan contributions, and donating appreciated shares to charity can also produce substantial tax savings with proper timing. But most importantly, knowledgeable tax planning experts know how to steer around complex tax pitfalls and ever changing regulations to help clients legally minimize taxes owed while still meeting their other financial priorities.
Don't wait until you've been stuck with a huge tax bill from obscure regulations to seek out expert help. Reach out now to get personalized tax minimization strategies in place before year-end.
An ounce of proactive planning is worth a pound of reactive fixes when it comes to taming complex tax liabilities. With the right guidance, you can feel confident that you are maximizing your wealth while still meeting your tax obligations.
