Tax Planning for High Income Individuals

High-income individuals face a tax structure that is different from middle- or lower-income Americans, called an Alternative Minimum Tax. The AMT subjects high-income earners to a minimum tax that is higher than it otherwise would be. Avoiding this requires careful tax planning. High-income earners also face the threat of estate taxes when they die, which may reduce the inheritance they're able to give to heirs. Avoiding or minimizing the impact of these taxes requires careful tax planning.

Itemize Deductions

Itemizing deductions is generally more beneficial than taking the standard deduction for high-income earners subject to the alternative minimum tax. This is because the IRS always adds the standard deduction back into the gross income calculation when calculating the AMT. When itemizing tax deductions, your gross income may fall below the threshold of the AMT, causing you to be taxed at the lower rate rather than the AMT rate.

Gifting

You may give up to $13,000 annually without paying gift taxes. In some instances, you may deduct the gift from your gross income when calculating your income tax liability. This deduction is possible when you make a gift to a charitable organization. The deduction helps lower your income. It could be valuable if the gift is less than the tax that would result on the total of your income had you not made the gift.

Life Insurance

Life insurance is a financial contract that allows you to pay premiums on an after-tax basis and give your heirs a tax-free death benefit. The death benefit is inflated, in relation to the premium payments you pay, which allows you to give far more than the money you actually contribute to the insurance company for the death benefit. This allows you to expand your estate without ever accumulating the money yourself. Since the insurance policy is passed to your heirs income tax-free, this could create a substantial inheritance to your heirs. Additionally, you may remove the life insurance policy from your estate using a life insurance trust. The life insurance trust will prevent the death benefit from being included in your estate for estate tax purposes. This means the policy will escape both income and estate taxes, thus lowering the tax burden to your heirs upon your death.

Premium Financing

Premium financing is a way to buy insurance with a loan. This is particularly attractive when you are a wealthy business owner. You may use the business assets as collateral for a loan that will buy life insurance or some other type of insurance. The interest cost of the loan may be tax deductible. The money you spend on the insurance premiums may be lower than what the premiums would otherwise be. This is especially true in situations where you're purchasing life insurance and premiums are high due to your age or health condition. The premium financing allows you to deduct some of the cost for the insurance policy while buying more insurance than you otherwise would be able to.

References

• IRS.gov: Alternative Minimum Tax (AMT) Assistant for Individuals
• IRS.gov: Frequently Asked Questions on Gift Taxes
• "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, et al.; 2007