High-Net-Worth Tax Planning: How to Maximize Savings
For high-net-worth individuals, tax planning involves strategically structuring income, investments, and assets to minimize tax liability while maximizing wealth growth. Below are key strategies to consider:
1. Income Optimization
- Diversify Income Streams: Shift income to lower-taxed sources like qualified dividends and long-term capital gains.
- Maximize Tax-Deferred Accounts: To reduce taxable income, contribute the maximum allowable amounts to IRAs, 401(k)s, and Health Savings Accounts (HSAs).
- Roth Conversions: Convert traditional IRAs to Roth IRAs in lower-income years to benefit from tax-free growth.
- Executive Compensation Strategies:
- Utilize deferred compensation plans to lower current taxable income.
- Optimize stock options, restricted stock units (RSUs), and deferred bonuses for tax efficiency.
- Leverage nonqualified deferred compensation (NQDC) plans to defer income tax until retirement.
- Be mindful of overall investment exposure to your company when using these strategies.
2. Investment Strategies
- Tax-Efficient Investments: Invest in municipal bonds (tax-free interest), ETFs (lower turnover), and index funds for tax efficiency.
- Capital Gains Management: Prioritize long-term capital gains to take advantage of lower tax rates. Use tax-loss harvesting to offset gains and carry forward future tax credits.
- Strategic Asset Location: Allocate investments between taxable and tax-advantaged accounts for maximum tax efficiency.
3. Charitable Giving
- Donate Appreciated Securities: Avoid capital gains taxes while claiming deductions at full fair market value.
- Use Qualified Charitable Distributions (QCDs): Satisfy Required Minimum Distributions (RMDs) from IRAs tax-free by donating directly to charities.
- Leverage Donor-Advised Funds (DAFs): Receive an immediate tax deduction while maintaining control over future charitable distributions.
- Consider Charitable Remainder Trusts (CRTs): Convert appreciated assets into lifetime income while securing a tax deduction.
4. Estate & Gift Tax Strategies
- Lifetime Gifting: Use the annual gift tax exclusion ($19,000 per recipient in 2025) to transfer wealth tax-free. Utilize the lifetime estate tax exemption ($13.99 million per individual in 2025) to shield wealth from estate taxes.
- Establish Irrevocable Trusts: Shift assets out of your taxable estate to protect wealth from estate taxes.
- Utilize Family Limited Partnerships (FLPs): Transfer wealth to family members while reducing tax liabilities.
- Implement Irrevocable Life Insurance Trusts (ILITs): Keep life insurance proceeds out of your taxable estate while managing estate tax liabilities efficiently.
Tax Planning for High-Net-Worth Individuals
Effective tax planning for high-net-worth individuals requires a tailored approach. Collaborate with tax professionals, estate planners, and financial advisors to stay ahead of tax law changes and optimize your financial strategy.
Click here to schedule a complimentary consultation to discover how we can help you achieve financial success.
Shawna Theriault, CFP®, CPA, CDFA®
Senior Financial Advisor, Wiser Wealth Management
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