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These days, a lot of Americans earn enough to qualify for the highest taxes.
Per recent estimates, roughly a fifth of households earn over $250,000 in annual income, putting most of them in a 35% federal tax bracket. State and local levies take another big chunk, especially in high-tax locales like California and New York.
Of course, making enough money to face higher taxes isn’t the worst problem. But given that the tax code also provides myriad ways to reduce outlays, it’s not surprising that as people move up the earnings ladder, they often get more vigilant about using these strategies.
Enter startups. Over the past couple years, we’ve seen a steady flow of venture investment to companies offering services aimed at reducing tax liabilities. There’s particular interest in startups using AI to automate some of the historically more complex and cumbersome tax-saving strategies.
Several funded companies are focused on tax-saving accounts and portfolio strategies. Others are optimizing tax planning for particular types of career, including solo entrepreneurs, doctors and startup founders. Below, we highlight 11 funded companies in both categories.
Keeping more of what you make
By and large, startups are pitching the notion that, with some relatively low-cost, low-effort tweaks to one’s portfolio and recordkeeping, it’s possible to keep more of one’s earnings out of government coffers.
“One thing I like to remind our members is it’s not what you make that counts. It’s what you keep,” said Samita Malik, head of insurance at Arta Finance, a wealth management startup with a focus on tax-advantaged investments. It’s a maxim that applies to income as well as capital gains, she adds.
Over the past few years, with the rise in automation, we’re seeing more widespread availability of some investment strategies that were previously mostly the purview of the very wealthy. Fees and minimum account sizes have also declined, enabling more investors to take part.
Direct indexing
One of the areas startups are tackling is direct index investing. This is a strategy modeled after the ever-popular index fund, in which returns are tied to the performance of a major stock index, such as the S&P 500.
The twist for direct indexing, however, is that rather than own an index fund, investors actually own stock in each of the component companies. That means that for tax purposes, even if the overall index is up, investors have the option to generate losses on their portfolio by selling the worse-performing component companies. Those losses can offset gains elsewhere, reducing tax liabilities.
San Francisco-based Frec, which pulled in $26 million in Series A funding a year ago, is probably the closest to a pure-play startup in this area. The company offers direct index investments for more than a dozen indices. Arta and other asset and wealth management platforms, meanwhile, offer direct indexes as one of their investment options.
Other target areas
Other tax-saving areas startups are targeting include:
HSAs: For Americans with high-deductible health plans, health savings accounts allow one to put pre-tax money into their account, accrue potential gains tax-free, and make withdrawals for medical expenses without paying taxes. It’s increasingly an option that wealth management startups are offering.
Education savings accounts: Education savings accounts, otherwise known as 529 plans, offer a way to save money for education-related expenses with potential for tax-free investment gains and withdrawals. One of the startups focused on this area is Backer, which has raised over $18 million to date for a platform to set up college funds and encourage contributions.
Charitable remainder trusts: For those planning charitable contributions, one tax-saving approach that’s becoming more widely available is the charitable remainder trust. These trusts can allow one to donate appreciated assets, like stocks. This enables the giver to avoid liquidating the asset and potentially incurring tax on gains. Among startups, one pitching this offering is Valur, a company focused on tax-saving strategies for investors and entrepreneurs.
Freelancers and professionals
We’ve also seen startups raising funding in recent quarters for offerings aimed at particular work categories, such as freelancers, doctors and founders.
One is San Francisco-based Lettuce Financial, focused on solopreneurs with a promise to automate taxes and maximize savings. In a similar vein, New York-based WorkMade offers expense-tracking and tax-filing services for freelancers.
In the medical field, meanwhile, Earned Wealth picked up $200 million this summer to grow its platform that offers professionals tax planning and investment advice.
There’s a big market for this stuff
As startups offering tax-mitigating services scale up, it’ll likely be execution more than demand that determines who will prove most successful.
After all, most of us would welcome easy-to-use, inexpensive tools that lessen our legal tax burdens. If startups and AI can manage to deliver on this front, there’s certainly a large pool of willing consumers.
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Illustration: Dom Guzman
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