Paying taxes will never be a fun activity, but you can make it less painful for yourself by reducing your tax bill as much as possible.
In particular, you can take action now to make sure your investments are optimized for tax efficiency. These strategies are available to every Accredited Investor, but many people never take advantage because they just aren’t aware of how easy it can be.
We’ve identified a few common misconceptions we’ve heard about the concept of “tax efficiency.” Keep reading to learn the truth about what tax efficiency means, who it’s for, and how you can take action today to start paying less taxes for 2022.
1. Tax Efficiency Only Matters if You’re Ultra Wealthy
Many people brush past the idea of tax efficiency because they think it doesn’t apply to them. This misconception might stem from the fact that often when we hear about major tax breaks, it’s in the context of the wealthiest people in the world.
In reality, if you’re an Accredited Investor, you’re most likely going to fall in one of the top 3 income tax brackets. This means your income tax rate will be somewhere between 32-37% in 2022.
If the idea of giving one-third of your income or more to the government alarms you, then you should absolutely focus on making your portfolio as tax efficient as possible.
It’s also important to keep in mind that tax efficiency is not just about claiming deductions when you go to file your taxes. To build a truly tax efficient portfolio, you should be thinking about these concepts year round, and using them as a guiding principle as you make investment decisions.
2. Qualified Funds are the Best Way to Reduce Your Taxes
Whether it’s from parental or information you hear at work, many of us spend years believing that the best way to pay less taxes is by putting money into a 401(k) or IRA. However, this is a short-sighted strategy that ultimately leaves many people with less retirement savings than they thought they’d have.
When you put money into one of these qualified accounts, that money grows “tax deferred,” which means you don’t have to pay taxes on the money you put into the account — or the returns and interest you accumulate over time — right away.
But as soon as you withdraw the money, you will have to pay income tax. And the better your account performs, the more you will have to pay eventually.
In the end, these accounts are not reducing your taxes, they’re just prolonging the time until you have to pay them. If you forget to plan for these deferred taxes, or you underestimate how much you’ll owe, you may find yourself having to choose between lowering your standard of living or postponing your retirement.
3. The More You Make, the More You Have to Pay in Taxes
Aside from putting money into a 401(k) or IRA, many people focus on passive income generation as a way to multiply their salaries. And while passive income is often taxed at a lower rate, generally speaking, it cannot decrease the amount of tax you owe on your earned (W-2) income.
So no matter how well your investments perform, you’ll still end up paying more taxes each time you make more money.
At FGCP, Tax Efficiency is More than Just a Buzzword
While many financial professionals will talk about tax efficiency, not everyone truly prioritizes it. At First Generation Capital Partners, we know that tax efficiency is not just a trend or a marketing tool, it’s the key to building wealth on your own terms, without working harder or giving up more of your time.
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