5 Tax Tips From the Rich, Including Why You Should Not Do Your Own Taxes
No one can escape doing taxes — a process that can be overwhelming, confusing and, to some, a source of great anxiety. Whether you’re in the lower income bracket, middle class or a millionaire, the deadline is the same. And so are the penalties if you don’t abide by that deadline.
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While many Americans ponder whether to do their taxes themselves or use accountants or one of the many “do-it-yourself” tools such as Turbo Tax, Tax Slayer and H&R Block, the decision is quite simple for people who have wealth.
“If you have not seen the tax code, it is a book that when laid flat would be over 6 feet feet thick,” said Steve Davis, CEO of Total Wealth Academy. “And people who do their own taxes think they will master that.”
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Let the Pros Handle Your Taxes
Davis said this is part of the “cheap your way through life strategy. The save-your-way to success. It doesn’t work.”
According to him, CPAs don’t cost you money, they save you money.
“People who think they are saving by doing their own taxes are most likely losing money by doing so,” he said. “They miss things that could have been written off and never really develop a tax strategy that a quality CPA would help you do.”
Instead, Davis said he focuses 95% of his time on making more money — not wasting it in doing his own taxes.
“That shows a low value for your time,” he said. “Five percent of my time is on saving and cutting costs. But doing my own taxes is not a good way to save money. What should you be doing instead of your own taxes? Read a book on making more money. Let the pros handle the tax code.”
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Recognize Your Limitations and Know That a CPA Can Optimize Strategies
Gene Caballero, co-founder of GreenPal and a self-made millionaire, echoed the sentiment, saying that recognizing his strengths and limitations has been crucial to his success.
“And when it comes to taxes, I’m well aware that it’s not my forte,” he said. “The complexity and ever-changing nature of tax laws mean that I could never trust myself to manage my own taxes effectively.”
That’s why he relies on the expertise of a professional accountant, as the accountant’s knowledge ensures compliance, optimizes financial strategies and safeguards his interests.
He said, “This approach underlines a key principle I live by: understanding the value of specialized knowledge and the importance of delegating tasks outside my expertise for the best possible outcomes in my financial management.”
Grow Your Income Without Paying a Lot of Taxes on It
According to Edward Meyer, a Fiverr freelancer who works as a tax consultant, the biggest thing is growing your income — without paying a lot of taxes on it.
“The average millionaire who wants to save money in taxes is going to focus on asset purchases to lower taxes,” he said. “I’m talking about making an investment in a retirement account, the purchase of a rental company, things like that that can help ‘lower’ their income or create additional income that’s tax free or very low tax.”
According to Meyer, if you earn money through a W-2, as you scale up in income, your taxes scale up with you. “But if you diversify your income, you can earn income that has lower tax rates.”
Focus on Investment Income Rather Than Salary Income
This not only results in realized gains on investments being taxed at a significantly lower rate than salary income, but also the taxes can be deferred by not selling investments, and even avoiding income tax completely on those investments if held until death — although they may be subject to estate taxes for very large estates, explained Mark Luscombe, CPA, attorney and principal analyst at Wolters Kluwer’s Tax and Accounting Division North America.
Additional Strategies
According to Luscombe, another strategy millionaires use is borrowing money to finance business operations, as it can generate interest deductions for the business, although there are some limits on business interest deductions.
He added that there are several other lesser strategies used by the wealthy, even those who may not be millionaires.
For instance, hiring their children in business with the goal that their salaries will be taxed at a lower rate than the parents’ salaries. Or this could entail buying a second home or yacht to get the mortgage interest deduction on both the primary and secondary home.
The strategies also can include setting up retirement plans that maximize what the owners of the business can defer for taxation later and buying whole life insurance.
“Planning to lower your income taxes requires planning throughout the year,” he said. “The experts that you hire hopefully save you more money that you pay for their expertise. Once it is time to file your tax return for the year, it is usually too late to take the actions during the course of the year that would have help to lower your taxes.”
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