Whether your wealth came through your sweat equity or from inheritance, your peace of mind comes from ensuring that it lasts to take care of your family well into the future. Deliberate and strategic tax planning before filing season, and throughout the year, can help you keep more of what you earn and minimize what you give the government in taxes.
According to U.S. News & World Report, typical high-net-worth individuals hold between $1 million and $5 million in liquid assets. An experienced wealth management advisor knows which high-net-worth tax strategies will help protect your money.
If you're a high-net-worth individual, it's essential to be thoroughly prepared and strategically informed about the complexities and opportunities in your tax situation. Here is a list of several tax strategies for high-net-worth individuals designed to optimize wealth preservation and tax efficiency.
One of the first high-net-worth tax strategies you’re likely to hear from a financial advisor is maximizing your contributions to your 401(k) savings account. These contributions are pre-tax, which means they can lower your taxable income.
The maximum contribution for an employee for 2023 is $22,500, according to the Internal Revenue Service. If you’re 50 or older, the catchup contribution has increased to $7,500, which gives you a maximum contribution of $30,000.
If you’re a business owner, you also can maximize your contributions to your employees’ savings accounts, with a combined contribution limit of $66,000 per worker. This strategy will also reduce your taxable income.
Charitable giving should always be a part of tax-planning strategies for high-net-worth individuals. Additionally, this approach not only provides tax benefits but also aligns with the values and social responsibilities of the affluent.
You can certainly reduce your taxable income by deducting cash donations. Moreover, by donating assets like appreciated securities, you can bypass capital gains tax while claiming a tax deduction for the value of the security donated.
Financial advisors also frequently suggest a donor-advised fund when helping with tax planning for high-net-worth individuals who want to donate to charities.
With a donor-advised fund, you can contribute a substantial lump-sum donation, which is fully deductible in the same fiscal year. When coupled with a capital gain of similar size during the same taxable year, the donor-advised fund can help save you money. As a bonus, you control the fund, allowing you and your heirs to determine when and where donations go.
As previously mentioned, your charitable donations don’t have to be in cash. You also can gift items of value, such as vehicles, electronics, collectibles, stocks, etc. Compared to other high-net-worth tax strategies, this approach might not seem as valuable, but it can garner a tax deduction for an asset you might not have been using (and one you didn’t have to sell to derive value from).
Investing in real estate is an excellent way to diversify a portfolio when tax planning for wealthy individuals, and there are other benefits come tax time.
For instance, you can deduct expenses directly related to your investment: property taxes, insurance, mortgage interest, and maintenance and repair costs. You also can write off any costs you’ve incurred for advertising, office space, and equipment for business purposes.
All these write-offs can lower your taxable income. Just make sure you keep accurate records of your expenses.
A high-net-worth tax plan should also include provisions for maxing out your health savings account (HSA). Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free.
According to Bankrate, the maximum annual contribution is $4,150 for an individual and $8,300 for a family. If you’re 55 or older, there’s an additional $1,000 catchup contribution.
Municipal bonds can be another valuable part of your high-net-worth tax plan. Local and state governments sell these bonds to fund projects like the construction of bridges and water systems. The interest you earn on municipal bonds isn’t subject to federal income taxes, and it may be exempt from state and local taxes, depending on where you live.
As a person of high net worth, you aren’t eligible to place your savings in a Roth individual retirement account to take advantage of its tax-free saving ability. However, you can place your money in a traditional IRA and then convert it to a Roth IRA to take advantage of the tax benefit.
Timing is crucial here, so you’ll need to work closely with your wealth management advisor.
When strategizing on how to plan taxes for high-net individuals, a wealth management advisor will take into account factors such as whether the individual has children or grandchildren who may attend college in the future. Investing in a 529 plan doesn’t come with a tax deduction. However, there are no taxes on earnings or withdrawals when the money is used for qualified education expenses.
Among high-net-worth individuals’ tax strategies, financial advisors might consider tax-loss harvesting to help clients save on taxes.
This strategy involves selling off securities that have taken a loss and using that loss to offset gains from other securities. Subsequently, you can reinvest in comparable yet distinct securities to preserve the equilibrium of your investment portfolio.
Keep in mind that this list doesn’t cover all the many tax strategies for high-net-worth individuals available. You can learn more about making the right moves to protect your wealth by consulting a qualified wealth management advisor.
Ensuring that your family possesses sufficient savings for a comfortable future is your top priority. Likewise, it holds significant importance for the wealth management advisors at Porte Brown, who dedicate time to understanding your unique financial situation and provide the high-net-worth strategies essential for safeguarding your family's financial security for generations.
Porte Brown offers custom wealth management through a wide range of services, including tax planning, retirement planning, investment planning, insurance, income protection, and asset preservation.
Contact us today to ensure your high-net-worth tax planning strategy aligns with your goals.
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