Taxes sting no matter the income bracket; however, if you’re a high-net-worth individual (HNWI) then we often see the tax bill become crushing.
It’s a hard truth: the more you earn, the more taxes you pay. Because the government takes a bigger bite out of your hard-earned income above the “average” earner, it’s essential to strategize effectively to mitigate against taxes.
With years of experience managing HNWI financial plans, we have a suite of advanced tax strategies to mitigate and plan around your tax bill.
This guide gives insights into the top high-net-worth tax strategies we recommend to our clients.
How is Taxation Different for HNW Individuals?
Taxes uniquely affect HNWIs because of several factors.
Among these is the complexity of your assets and investments, which often include businesses, real estate, and international holdings. We often see audit risk or just wasted money paid if you fail to strategize and plan around taxes at the highest level.
In May of 2024 we met with a business owner that asked to us to do a tax evaluation. We completed the review and the individual had a full page of notes of things that were inaccurately reported and ways to reduce his tax bill that his CPA had missed. By implementing the feedback from our tax team, this business owner had a more intelligent tax return, had reduced audit risk, and had several ideas we will work to implement with him for this next year.
Tencap will reserve our leading tax plans for our clients. However, below are a few to consider:
7 Tax Strategies We Recommend for HNWIs
You can examine this type of strategy to relieve the weight that taxes place on your bank account:
1. Leverage charitable gift-giving for tax deductions
Giving to charities is a powerful strategy for reducing taxable income while supporting causes you care about. Donating assets like stocks or real estate can help you avoid capital gains taxes and receive a deduction based on the asset’s fair market value.
For instance, if you donate $100,000 worth of appreciated stock you originally bought for $50,000, you can deduct the total $100,000 and avoid paying taxes on the $50,000 gain.
2. Take advantage of tax loss harvesting every year
Tax loss harvesting involves selling assets at a loss to offset the gains from your other investments, thereby reducing your taxable income.
This strategy can be helpful at the end of the year because then you can review your overall financial performance. By waiting until year-end, you can tally up your total gains and losses across all investments, making it easier to decide which ones to offset.
*Here is an assertion to consider… if your investment strategy is creating losses you are constantly using this method, it may also be time to consider interviewing another financial planning firm!
3. Make the Roth IRA conversion ladder work for you
The Roth IRA conversion ladder lets you convert traditional IRA funds into a Roth IRA over several years to leverage tax-free growth and withdrawals.
Converting smaller amounts each year lets you control the additional taxable income, potentially keeping yourself in a lower bracket and reducing your total liabilities when it’s time to withdraw your investment.
Your funds in the Roth IRA are also tax-free, meaning you get more returns as it grows.
4. Contribute to tax-advantaged accounts
Using 529 plans for your children’s college fund or health savings accounts (HSAs) for medical expenses can reduce your taxable income. Contributions to these accounts are often tax-deductible, and withdrawals for qualified expenses are tax-free.
For instance, a family contributing to a 529 plan can deduct up to $10,000 per year in some states, while HSA contributions can cover your medical needs tax-free.
5. Restructure your business entities
If you own or co-own a business, you can use it to ease the burden of taxes.
One practical approach is converting a sole proprietorship or a partnership into an S-corporation. Unlike sole proprietorships and partnerships, S-corps allow owners to separate their income into salary and distributions.
In an S-corp, you pay yourself a reasonable salary subject to payroll taxes. You can then take the remaining profit as a distribution, not subject to self-employment taxes.
For instance, if your business earns $200,000 annually, you might pay yourself a salary of $100,000 and take the remaining $100,000 as a distribution. Doing this step can save you a significant amount in taxes.
However, note that there is the lens of tax strategy, and there is the lens of intelligent business structuring. You need to look through both, not just one.
6. Employ capital gains reduction strategies
Did you know holding investments for more than one year benefits you with lower long-term capital gains tax rates? By contrast, the government taxes short-term capital gains as ordinary income up to 37% for high earners.
Meanwhile, long-term gains have reduced rates, typically 15% or 20%, depending on your income. (Based on legislation, this year).
7. Consider income shifting to lower tax brackets
Income shifting involves distributing income among family members in lower tax brackets to lessen the overall tax burden. You can do this method through family trusts or by gifting income-producing assets to children or other family members in lower tax brackets.
Since the government taxes the dividends paid on the gifted shares at the beneficiary’s lower rate, your overall tax bill decreases.
Save These Strategies to Save Your Future
If you have a high net worth, having the right strategies to lessen the pain of taxes is crucial. Methods like tax loss harvesting, Roth IRA conversion, capital gains reduction, and the like go a long way in reducing your obligations while growing your wealth.
These are just a few of the basic ideas that can be examined. If you have any interest in exploring deeper what some additional high-level strategies may look like, we would be happy to discuss this more and examine your specific tax plan.
Tencap is really clear on what you exchange for each dollar you earn! Our team is committed to helping you build and secure your wealth and becoming financially independent and retirement ready!
You can rely on our years of experience as tax planners to tailor strategies that best fit your needs. We have an impressive team of many CPAs and attorneys that assist us in our commitment to help no more in taxes than is required.
If you are ready to start leading out with intelligent and deliberate tax planning, it’s time to engage the Tencap team. The best part is we offer a no-cost consultation where we will look at your situation and determine if we can add value before we ever discuss cost. Call today to schedule your no-cost consultation!
Discover 7 Reasons Why Our Advisory Services Are Worth the Fee, or reach out to Tencap Wealth Coaching for more information.
Joe Griffin
Joe has been building and managing financial planning firms for the past 14 years. He loves the financial planning space and is very proud of the success and growth that has come from his proprietary marketing and leadership. Joe spent years being involved with the bright minds of the investment committee at Utah’s 529 college savings plan – a plan managing over 20 billion. Joe only works with firms that are stated fiduciaries on a client relationship. Joe is committed to leading a financial planning firm with ethics and integrity. The money management philosophy that Tencap subscribes to is built on strong academics and is supported by a highly impressive academic board. We can't wait to coach you on the excellence that Tencap stands for.
