How To Use New Tax Law To Cut Your Tax Bill
The season to file taxes is upon us. The deadline for filing was April 15th, but the IRS does give late filers a short grace period. This year’s tax season is a little different as the Trump Administration’s new tax law went into effect on January 1, 2019.
With the new tax law taking away fees in some places and adding more in others, it’s important to know how to cut your tax bill to maximize your return. The upper class has a knack for cutting their taxes down, so how do they do it? Here are a few ways you can maximize your return, despite the new laws:
1. Charitable Donations
One of the most common ways that the richer crowd get a tax break is their long-standing reputation of donating to a non-profit organization. While most people frown upon the idea that a tax break is earned for the donation, one should consider the people who truly benefit.
And thanks to the new tax law, instead of deducting 50% from charitable donations, you can now deduct up to 60%. Sounds like good news for those in the spirit of giving.
This is sometimes done in the form of conservation easements. And according to CPA Lisa Featherngill, “oftentimes you can work with land conservation trusts and you can take a charitable deduction for the value of the conservation trusts and you can take a charitable deduction for the value on placed on the property.”
2. Increasing Equity Exposure, Managing Gains
One of the best ways to stay wealthy is to invest in the stock market. If your equity in stock was held for at least one calendar year, then you make get a lower tax rate when it is time to sell. For some, this means the leeway to take more risk.
“Many who have higher net worth have higher risk tolerance preferences and risk capacity, so target date and low-risk funds don’t always make sense,” states Ron Carson, CEO/Founder of Carson Group.
Loss can be a good thing, allowing you to ensure the debts that result are paid to balance out your returns, should they be more than substantial.
Other wealthy individuals have invested in low-income communities through opportunity zone programs, oftentimes helping fund infrastructure projects. Don’t think of it as just a benefit for the rich either. “If the gain is sizable enough, in terms of material enough for them, they can look at ways of deferring tax on the gains,” says Featherngill.
3. Managing Assets Like a Business
Featherngill suggests that a great tax-saving trick is to create an LLC to manage the investments in your possession. There is no doubt that establishing any company can get out of hand, in a sense. But Lisa explains exactly how it can help with managing assets. “If the LLC is a management company that provides oversight and advice to owners of the assets, under certain circumstances, the expenses incurred by the LLC will be deductible as business expenses.”
4. Estate and Gift Tax Exemptions
An ‘estate tax’ is any tax placed on an inheritance exceeding what is allowed by tax law. A ‘gift tax’ is placed on any charitable giving to a person exceeding $14,000. While you cannot give someone more than that much, you can give that exact amount to multiple people.
According to CNBC, the new tax law has actually doubled these particular exemptions. And Lisa Featherngill says, “Individuals can now claim up to $11.18 million, compared to the $5.29 million limit per person in 2017. The exemption expired at the end of 2025.”
Some people set up a ‘trust’ to ensure that the family fortune is passed down each generation, but it does indeed cost a pretty penny. Therefore, only seek to set up a trust if you have more than $4.5 million to do so.
5. Defined-Benefit Plan
“a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum (or a combination thereof) on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment returns.”
This plan, much like the traditional pension, also allows one to put in funds for when they retire. Play your cards right, and Carson says you can manage over 200k per year. “This can be a great way for a high net-worth individual running a successful business to set aside tax-deferred money above and beyond what they can put aside in a 401(k).”
Know that your contributions to a defined-benefit plan will help lower taxable income and make it so you qualify for an addition 20% deduction.
Make sure it is tailored especially for your situation, otherwise consider a 401(k) or a SIMPLE IRA.