Tax Planning Strategies for High Net Worth Individuals

There are a number of ways to reduce taxes for high net worth individuals. These include tax-loss harvesting and Roth IRA conversions. However, it is important to consult with a wealth management professional to implement these strategies.

A good financial advisor will take a holistic view of tax. This includes advising clients on how to maximize their benefits. For example, they may recommend using a donor-advised fund to get an upfront tax deduction.

Tax deductions

A tax deduction is a reduction in the amount of income that’s subject to federal taxes. It can be as simple as donating property or assets to charity, which reduces taxable income. It can also be more complex, such as transferring funds between family members.

The recent tax law raised the standard deduction to $24,000 for couples. For high net worth individuals, this increase may not be enough to offset their tax burden. But, there are still a number of tax reduction strategies they can implement.

One strategy involves gifting unused stock options, real estate, or other assets to lower-income family members. This can reduce the overall tax liability and allow the lower-income member to invest their proceeds in a low tax bracket.

Another way to maximize tax deductions is by donating low-cost-basis stocks to charitable organizations. This strategy can be combined with other tax reduction techniques such as tax loss harvesting.

Employer-paid benefits

A tax planning strategy for high net worth individuals involves taking advantage of employer-paid benefits to minimize taxes. These benefits are usually not reported on the IRS tax return, so they can be a great way to reduce your taxable income. These include employer-sponsored retirement plans, health insurance, and flexible spending accounts.

Another tax reduction strategy is deferring or accelerating taxable income. This can help you reduce your exposure to capital gains tax and the 3.8% Medicare surtax on investment income. In addition, it can help you build post-retirement savings faster.

You can also use tax deductions to lower your taxable income. For example, you can contribute to a cash-value life insurance policy, which grows tax free and provides withdrawals that are not taxed. You can also donate to a donor advised fund in the same year that you take a large distribution from a retirement account, which will blunt the tax consequence that would otherwise be triggered.

Asset allocation

Asset allocation is the relative proportion of stocks, bonds and cash in an investment portfolio. It reflects an investor’s time horizon and risk tolerance, which can change over the course of a lifetime. For example, younger investors might emphasize stock growth, while older investors might focus more on bond and cash preservation. Investing in a low-cost target-date fund can also help diversify an investment portfolio and reduce taxes.

Another tax minimization strategy for high net worth households is to contribute to their children’s 529 plans. These funds grow tax free and can be used for qualified educational expenses. This can be combined with a tax loss harvesting strategy to further reduce an individual’s tax liability.

Lastly, a tax minimization strategy for high net worth individuals is to use charitable giving strategies. These can include using a revocable living trust or donor-advised fund to lower taxable income. It is important to consult a tax professional to learn more about these strategies.

Multi-state taxes

Multi-state taxes are a complex issue for high net worth individuals. A financial advisor can help you understand these issues and develop strategies to minimize your tax liability. For example, you can take advantage of reciprocity agreements to avoid double taxation and use a payroll provider that is familiar with state laws and regulations.

You can also maximize deductions by contributing to tax-advantaged accounts such as 529 plans, which can grow tax free and be used for education costs. In addition, you can reduce your taxable income by making charitable contributions to qualified charities in specific years.

Ultra-high net worth families often engage in philanthropy, which can result in significant tax advantages. In addition, they may establish trusts such as dynasty trusts, irrevocable life insurance trusts and grantor-retained annuity trusts to minimize estate tax exposure. In addition, these trusts can allow for income splitting and provide protection from creditors. In this complex environment, it is important for high net worth individuals to seek guidance from a wealth manager who specializes in tax-efficient investments.