These days, many Americans earn enough to qualify to pay the highest amount of taxes.
According to recent estimates, about one-fifth of households earn more than $250,000 a year, most of which fall under the 35% federal tax bracket. State and local taxes are even more of a burden, especially in high-tax areas like California and New York.
Of course, making enough money to withstand tax increases isn’t the worst problem. But given that the tax code also provides countless ways to reduce spending, it’s surprising that people often become more cautious about using these strategies as they move up the income ladder. It’s not something you should do.
Enter a startup company. The past few years have seen a steady flow of venture investment into companies that provide services aimed at reducing tax liability. There is particular interest in startups that use AI to automate some of the historically more complex and cumbersome tax-saving strategies.
Several funded companies focus on tax-advantaged accounts and portfolio strategies. Some companies optimize their tax planning for specific types of careers, such as solopreneurs, doctors, and startup founders. Below, we highlight 11 companies that received funding in both categories.
Leave more of what you made
Startups generally sell the idea that more revenue can be kept out of government coffers through relatively low-cost, low-effort adjustments to portfolios and record-keeping.
“What I like to remind our members is that it’s not what you do that matters; it’s what you keep.” said Samita Malik, head of insurance at Arta Finance. This adage applies not only to income but also to capital gains, she added.
In recent years, with increased automation, some investment strategies that were previously primarily the purview of the wealthy have become more widely available. Fees and minimum account sizes have also been lowered to allow more investors to participate.
Direct indexing
One area the startup is working on is direct index investing. It’s a strategy modeled after popular index funds, whose returns track the performance of major stock indexes such as the S&P 500.
However, the difficulty with direct indexes is that investors do not own the index fund, but actually own shares in each constituent company. This means that for tax purposes, investors have the option of incurring losses in their portfolios by selling underperforming constituents, even if the overall index is rising. These losses can offset gains elsewhere and reduce your tax liability.
San Francisco-based Frec, which raised $26 million in Series A funding a year ago, is perhaps the closest thing to a pure startup in the space. The company offers direct index investing in more than a dozen indexes. On the other hand, Arta and other asset and wealth management platforms offer direct indexing as one of their investment options.
Other target areas
Other tax savings areas that startups are targeting include:
HSA: A health savings account allows Americans enrolled in high-deductible health plans to deposit pre-tax funds into the account, accumulate potential gains tax-free, and pay no taxes. You can withdraw medical expenses. Wealth management startups are offering more options.
Education Savings Accounts: Education savings accounts, also known as 529 plans, offer a way to save for education-related expenses with tax-free investment gains and withdrawals. Backer, one of the startups focused on this space, has raised more than $18 million to date as a platform for establishing university endowments and encouraging giving.
Charitable Remainder Trusts: One tax-saving approach that is becoming more widely available for those planning charitable giving is the charitable remainder trust. These trusts allow you to donate valuable assets, such as stocks. This allows the donor to avoid liquidating assets and potentially incurring taxes on gains. Among the startups touting the service is Valur, a company focused on tax-saving strategies for investors and entrepreneurs.
Freelancers and professionals
In recent quarters, we’ve also seen startups raising money to provide services to specific job types, such as freelancers, doctors, and founders.
One is San Francisco-based Lettuce Financial, which focuses on self-employed businesses with the promise of automating their taxes and maximizing savings. Similarly, New York-based WorkMade offers expense tracking and tax filing services for freelancers.
Meanwhile, in the healthcare space, Earned Wealth raised $200 million this summer to grow its platform that provides tax planning and investment advice to professionals.
There’s a big market for these things
As tax-saving startups scale, execution rather than demand is likely to determine who is most successful.
After all, most of us would welcome an easy-to-use, inexpensive tool that would reduce our legal tax burden. If startups and AI manage to make a mark on this front, there is no doubt that there will be a large pool of willing consumers.
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Illustration: Dom Guzman
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