Tax season is inevitably a frustrating time, especially when you feel like the more money you make, the more you have to give to the government.
And while it’s too late to reduce the amount of taxes you owe for 2021, there’s no time like the present to start thinking about your 2022 tax strategy.
In particular, the investments you make and how long you hold onto them can have a major impact — for better or worse — on the amount you pay in taxes. It’s important to take some time each year to think about what parts of your portfolio are working for you, and which areas have room for improvement.
If you’re looking to build a more tax efficient portfolio in 2022, here are a few key things to keep in mind.
1. Tax-Deferred is Not Tax-Free
Many people think that the best way to reduce their tax burden is by making maximum contributions to qualified funds like an IRA or 401(k).
When you put money into one of these accounts, it is “tax deferred,” meaning you don’t have to pay income tax on it right away, and the money grows without being taxed for as long as it stays in the account.
While these accounts are helpful tools for saving for retirement, it’s important to remember that you will have to pay taxes when you withdraw the money later.
If you forget to plan for these deferred taxes, or underestimate how much you’ll have to pay in taxes, you may find yourself left with less money than you expected upon retirement. It’s never ideal to have to choose between lowering your standard of living or postponing your retirement, but many people find themselves in that situation after they’ve relied too heavily on IRA and 401(k) contributions earlier in life.
2. You Can Grow Your Wealth While Decreasing Your Taxable Income
Many investment strategies concentrate on growing your passive income, but certain investments can actually decrease the amount of taxes you pay on earned income.
For example, Accredited Investors can gain access to a direct investment in carbon capture equipment that is currently being used in the energy sector. As investors are participating in a strategic industry that provides more energy there are specific tax benefits for their involvement. This particular investment allows investors to apply bonus depreciation rules to their active income.
This is especially beneficial because active income, which includes earned income (W-2 income), is typically taxed at the highest rate. Plus, the money you invest will grow so you get a return on your investment while also paying less taxes.
3. Diversification Can Help with Tax Efficiency
To make your investments more tax efficient, you should not only think about the tax rates on specific assets, but also your portfolio as a whole.
For example, ETFs are typically more tax efficient than mutual funds, but if you only focus on investing in the stock market, you’ll miss out on other opportunities to grow your wealth and minimize your tax burden.
Similarly, if you only focus on putting money in tax-deferred accounts, you’ll save money in the short term, but you’ll end up having to pay more taxes in the future.
Diversifying your portfolio by investing directly in companies will also allow you to take advantage of additional tax benefits that aren’t available when you only invest in stocks and other similar assets. This allows you to build your wealth in a way that’s both efficient and sustainable for the long-term.
Partner with an Expert that Prioritizes Tax Efficient Investments
The more money you make, and the more you invest, the more complicated your finances can become. This is not necessarily a bad thing, but it does mean that finding the right partners is vital for long-term success as a high-net-worth investor.
If you’re an Accredited Investor looking for new ways to make your portfolio work for you, FGCP™ can help you assess potential investments and continue building wealth with tax-efficient, cash-flowing direct investments. This includes a unique opportunity to invest in a carbon capture equipment raise that is structured to create consistent future returns and is tax efficient because it lowers your earned income (W-2 wages).