President Biden’s recent tax proposals target the wealthy.
According to the New York Times, proposals are intended to “turn up the dial on more conventional tax policies, while adding some new wrinkles to curb maneuvers that allow tax avoidance.”
In the long term, there will be clear pressure on corporate, personal, and capital gains taxes. Business owners, facing the threat of the Biden Tax plan and future increases in taxes are looking for alternative strategies that reduce their tax liability and optimize returns.
There are several unknown tax mitigation strategies that can lessen the impact of these proposals currently under consideration.
Four Tax-Mitigation Solutions:
- Cash Balance Plans: This unique retirement plan can dramatically expand retirement savings and reduce taxes.
- Intangible Drilling Credits: These highly specialized tax incentives, on oil and gas drilling, can deliver deductions as high as 90% in the first year.
- Land Conservation: Tax deductions offered through land conservation may offer up to 250% to 500% in the first year.
- Leverage Life Insurance: Through leveraged life insurance, you may finance insurance premium payments allowing you to triple your investment and receive beneficial tax treatment.
Cash Balance Plans
Cash balance plans are defined benefit (DB) retirement plans with features that resemble a defined contribution (DC) or 401(k) plan (also known as a hybrid plan). These plans may be sponsored by both single-person business owners and large corporations.
Their primary benefit is allowing higher retirement contribution amounts compared to a 401(k) plan (e.g., $19,500 for 401(k) deferrals and up to $58,000 with the inclusion of a profit sharing plan for 2021). Contributions inside a cash balance plan can reach up to four times what traditional retirement plans offer, some in excess of $250,000, which can offset taxes on a dollar-for-dollar basis.
Initially a hidden gem, cash balance plans are growing in popularity, but are a relatively underutilized tax mitigation solution. Download our brochure.
Intangible Drilling Cost (IDC)
Energy development from domestic reserves helps make the US more self-sufficient by reducing dependence on foreign imports. To encourage private investment in American energy independence, Congress has provided significant tax incentives for companies and individuals who invest in the drilling of oil and natural gas.
Oil and gas production is labor intensive, so a significant portion of the expenditure is considered Intangible Drilling Cost or (IDC). IDC deductions create an immediate, above- the-line tax deduction that can reduce any income type from any source, including capital gains income.
The IDCs can provide you with upwards of a 90% tax deduction in the first year. For example, a capital investment of $100,000 could result in approximately $90,000 in tax deductions for IDCs. The remaining $10,000 of tangible costs may be deducted as depreciation over a 7-year period.
Only accredited investors may access IDCs. Federal securities laws limit who may invest to ensure that all participating investors are financially sophisticated and able to sustain the associated risks. To find out if you qualify as an accredited investor, contact WealthPRIME.
Land Conservation
High-net-worth investors may use conservation easements to significantly save on taxes.
A land conservation is a legal agreement that permanently limits the use of designated land for conservation purposes, which can be any one of the following:
- Protection of natural habitat of fish, wildlife, plants, or ecosystem
- Preservation of land areas for outdoor recreation or education of the public
- Protection of historically important land or historical structures
- Preservation of open space
Land conservations are valuable when created through tax-deductible donations.
For example, if you own land, you can donate a portion of it to be used as a land conservation that counts as a charitable deduction. The charitable deduction can offset your income.
President Donald Trump put a spotlight on land conservation when he created an easement on his Mar-a-Lago estate in 1993. When the property was appraised at $25 million, he donated an easement that prevented him from selling antiques inside the historic buildings or adding more buildings to the compound. This easement ultimately reduced the valuation of Mar-a-Lago to $19.25 million. Trump received a tax deduction for the difference of $5.75 million once the easement was in place. He still owns the property and simply placed limits on some of its use.
The ideal participant should earn more than $500,000 and you are not required to be a landowner to take advantage of land conservation. Syndicated land conservations allow investors to partner with landowners to take tax deductions well above the money that they invest – up to 250% to 500% in the first year.
Leveraged Life Insurance
Wealth individuals typically require large amounts of life insurance to preserve their assets from being consumed by federal estate taxes.A leveraged life insurance financing arrangement allows the insured to take out a loan to pay the premiums on a life insurance policy.
For those who qualify, leveraged life insurance can be a valuable tool in generating cash that can be used to avoid the need to liquidate high-performing investments or to sell appreciated assets that could trigger capital gains taxes.
6 Key Benefits of Leveraged Life Insurance
- Income Tax Avoidance: Any interest that is credited to an indexed universal life insurance policy grows tax-deferred, and the death benefit of the policy is tax free.
- Gift Tax Avoidance: The first step in a leveraged arrangement is the creation of an Irrevocable Life Insurance Trust (ILIT). Funds of an ILIT are transferred to your trust to pay your insurance premiums. These are considered gifts and allow you to avoid extensive gift tax liability.
- Liquidity for Estate Taxes: Leveraged life insurance can assist in generating the needed liquidity to pay estate taxes and preserve assets for future generations.
- Asset Retention: This strategy provides a mechanism for high-net-worth individuals to acquire the needed life insurance coverage without the current use of assets.
- Additional Earnings: Payments of loan interest will be smaller than payments of life insurance premiums, thus creating financial leverage. Assets that are not used to pay premiums can be invested elsewhere, with the corresponding potential of additional investment earnings.
- Cash Flow Preservation: The financed loan interest that is required to be paid will likely have a smaller impact on your cash flow than paying the life insurance premiums.
Investing in leveraged life insurance is a complex financial transaction. Ideal candidates are wealthy individuals with a net worth of $5 million or more, should be under 70 years of age, a nonsmoker, and in suitable health to be medically underwritten.
Final Tax Proposals Are Pending
While the final proposal from the Biden administration is awaiting ratification, considering your options for tax mitigation is beneficial for your current and future wealth management.
To experience our new, all-in-one tax strategy that combines the above invest options, complete our Trinity calculator (send to business owner page) to see how you can reduce your taxes and protect future assets.
For more information on these alternative investment options or to discuss your tax planning, please call 855-774-6340 or email sales@wealthprime.com.
