The popular perception about high net-worth (HNI) individuals is they employ a long list of tax experts who formulate strategies for tax evasion and guide them all the way. There is even a perception of these individuals paying less taxes. The reality, however, is that the rich encounter tax rules, which severely curtail their eligibility to deductions, which other taxpayers can avail. There are also a number of tax issues specific to HNIs.
Keep in mind that there are multiple definitions of HNIs. The income size dictates the income tax paid by them.
Phaseouts of a few tax breaks
When an income crosses a certain limit, a few tax breaks could be lost.
- Exemptions related to personal and dependents. A few or all such deductions are taken away when the adjusted gross income surpasses a certain threshold amount. The phaseout in 2015 starts with an adjusted gross income of $258,250. For married couples who file jointly, the amount is $309,900. The adjusted gross income for complete phaseout is $380,750. For married couples filing jointly, the amount for the same is $432,400.
- Itemized deductions: It is applicable for maximum of 80 percent for contributions to charity, interest towards home mortgages, taxes on real estate and state income. Deductions are not applicable when adjusted gross income surpasses the threshold amount.
Wealthy people can avoid or minimize the phaseouts to an extent wherein they can be the recipient of income not presently taxed, like deferred compensation.
Extra tax burdens
If you are an HNI individual, your accountant may have informed you that you need to pay two extra taxes.
- A 0.9 percent tax on your earned income: The Medicare tax is applicable on income along with other applicable taxable compensation and self-employment income, in the case the modified adjusted gross income (MAGI) surpasses $200,000 (the amount changes to $250,000 for married persons who file jointly). Such thresholds are not subjected to annual adjustments for inflation.
- A 3.8 percent tax on the net investment income: The second extra Medicare tax is applicable on investment income chipped away by any investment expenses. To be specific, the tax could be applied only on the lesser net investment income or the amount by which the MAGI surpasses the identical threshold sum utilized for additional tax imposed on earned income. This particular tax has the effect of creating an effective tax rate of almost 24 percent applicable to wealthy individuals.
HNI’s must also pay taxes on foreign assets held by them. There are special reporting parameters imposed for the purpose, which increase the audit risk.
If you think you could use some tax advice, to hold on to what you have earned contact us we would be more than happy to discuss and review your taxation situation and provide a way to help you keep more of what you have earned!