I’m an Accountant: Here Are 5 Tax Tricks That Help My Wealthy Clients
If there’s one topic that confuses most of us, it’s taxes and how to plan accordingly for them to ensure that we make the right moves. As you make more money, you’ll likely have to pay more attention to your tax planning to ensure you can keep as much of your money as possible.
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We spoke with Reem Khatib, one of the top experts at Tax Law Advocates, to share tax tips that wealthy clients use to keep more of their money.
What are the tax tricks that the wealthy use?
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Detailed Bookkeeping
“Detailed bookkeeping is a fundamental practice employed by many taxpayers, including those with significant wealth, to ensure accurate reporting and compliance with tax laws,” Khatib said. “By maintaining meticulous records of financial transactions, investments and expenditures, wealthy clients can effectively substantiate their tax positions and demonstrate transparency in their dealings with tax authorities.”
If you want to save money on taxes and become more diligent with your finances, you’ll want to get into the habit of tracking everything. This will help you manage expectations and be aware of financial moves that you should make.
Khatib elaborated, “This approach not only supports compliance but also provides a strong foundation for effective tax planning and optimization within the bounds of the law.”
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Asset Structuring
“Asset structuring involves the strategic planning and organization of corporate and personal assets, both domestically and abroad, to optimize returns, protect wealth and influence the timing of taxation,” Khatib explained. “This practice encompasses the formation of domestic and foreign companies, annual statements of wealth and cash flow, and the use of various asset-holding structures such as trusts and private investment corporations to achieve tax efficiency and preserve assets for future generations.”
Wealthy people tend to have their assets structured in a way that helps ease the tax burden. This is why it’s crucial that you work with a tax professional to ensure that your funds are protected.
Khatib added, “By carefully structuring assets, individuals and businesses can proactively manage their financial resources and minimize tax liabilities through legal means.”
Set Up Legal Tax Shelters
“Establishing legal structures such as trusts with a step-up basis represents a prudent approach utilized by individuals and families to manage and preserve their wealth while minimizing estate tax burdens,” Khatib said.
Khatib recommends setting up tax shelters such as trusts with a step-up basis.
Here’s an example of how this works, according to Khatib: “Imagine a wealthy individual who holds stocks or real estate investments that have significantly appreciated in value over the years. If this individual were to transfer these assets to an irrevocable trust with beneficiaries (such as their children) and subsequently pass away, the assets held within the trust would receive a ‘step-up’ in their cost basis to their current market value at the time of the individual’s death.
“Now, when the beneficiaries eventually sell these assets, they would only be liable for capital gains taxes on any appreciation in value that occurs after the individual’s passing, potentially reducing the overall tax burden compared to if the assets had been transferred directly to the beneficiaries during the individual’s lifetime.
“This simplified example demonstrates how trusts with a step-up basis can be utilized within the bounds of tax laws to manage wealth, facilitate intergenerational asset transfer and potentially mitigate tax liabilities for beneficiaries.”
Khatib added a warning: “It’s important to emphasize that the term ‘tax shelters’ can often carry connotations of aggressive tax avoidance, which is not aligned with sound ethical and legal tax practices.”
Backdoor Roth IRA Withdrawal Write-Offs
“The concept of a backdoor Roth IRA withdrawal typically involves converting funds from a traditional IRA to a Roth IRA through non-deductible contributions, especially when individuals are ineligible for a direct Roth IRA contribution due to income limitations,” Khatib said.
“Navigating the tax implications and potential write-offs associated with backdoor Roth IRA withdrawals requires thoughtful consideration and professional guidance to optimize tax benefits while adhering to regulatory requirements.”
Gift Tax Exemptions
“If you want to go on vacation with the family, gift it to your children and write it off the year of,” Khatib said. You take advantage of gifts to share experiences together or to pass money down through assets to relatives. It’s worth noting that the lifetime exclusion went up to $12.92 million in 2023.
Additional Tax Considerations
Khatib shared a few additional considerations when it comes to utilizing tax tricks.
Always Follow the Rules
“As an executive for Tax Law Advocates, I would never encourage or promote ‘tax tricks’ that are legally questionable,” Khatib said.
You want to be confident that you’re following the law when making decisions about your tax planning. You don’t want to have any issues with the IRS because these could be stressful and expensive.
If Audited, Hire a Professional
“You have the money to do so, and hiring a professional will be the difference between failure and success during the audit process,” Khatib said.
As always, you should work with a financial professional who can help you based on your specific situation.
Khatib concluded, “It’s important to note that the implementation of such strategies should involve consultation with legal and financial professionals to ensure compliance and suitability for individual circumstances.”
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This article originally appeared on GOBankingRates.com: I’m an Accountant: Here Are 5 Tax Tricks That Help My Wealthy Clients
