Tax Planning Strategies for High Net-Worth Individuals

In the wealth management realm for high-net-worth individuals (HNIs), strategic financial planning goes over and beyond mere accumulation. Rather it involves meticulous asset orchestration and tax strategies that can help these individuals optimize financial outcomes efficiently.

Judicious tax planning thus plays a crucial role in HNIs wealth management. A nuanced and strategic approach, the main aim of this tax planning strategy is to optimize financial outcomes while minimizing the tax liabilities of these individuals within legal compliance boundaries.

With the aid of some tactical tax strategies, CPAs can therefore help HNIs effectively manage their tax liabilities and preserve wealth while aligning their goals with tax-efficient strategies.

But how can it be done? What are some of the strategies that can be employed to save money and make the HNIs future-ready?

Well, read on to explore the top tax approaches that you can employ for HNIs and help them save efficiently while staying compliant!

Top Tax Strategies for High-Net-Worth Individuals

Here are some of the ways by which CPAs can help HNIs optimize their wealth preservation:

1. Harvest Capital Gain/Losses

One of the pertinent methods to save on taxes of HNIs is the Harvest Capital Gain/ Loss strategy. In this method, those securities that have borne losses are sold off. The same loss is then used to offset gains from available securities.

In time, reinvestments can be made in comparable but different securities, which helps save the equilibrium of the investment portfolio. If there is an overall capital loss, CPAs can suggest generating capital gains to offset HNI’s loss. The capital loss then can be carried forward over $3,000 allowed present year loss to a future year, which would be subjected to additional limitations.

2. ROTH IRA Conversions

Another tax planning strategy that can be employed by CPAs includes ROTH IRA conversions. This strategy enables the HNI to convert their traditional IRA to a ROTH IRA. It involves paying taxes on the retirement income in the conversion year. Since income tax rates are likely to be modified to pre-TCJA limits post-2025, this can be an ideal method to save on taxes.

In addition, Backdoor ROTH IRA can also be considered. This plan enables the person to convert their non-deductible conventional IRA contribution to a ROTH IRA, irrespective of an income too high for a ROTH IRA contribution. If the converted funds are devoid of any earnings, the conversion is treated as a non-taxable event.

3. Charitable Contributions

The best way to save on taxable income is through charitable contributions. The approach not only extends tax benefits but also stands in line with the social responsibility of high-net-worth individuals.

In this strategy, cash and non-cash charitable contributions can be made, whereby HNIs can deduct as much as 60% of their AGI due to public charity contributions.

4. Estate Planning and Investment

CPAs can employ Estate Planning and Investment strategies, which can help diversify the portfolios of HNIs and minimize tax burden. In this, HNIs can make annual exclusion gifts of up to $17,000 to an individual for the 2023 tax year. However, in this strategy, it is essential to ensure that the estate planning documents of the HNI are updated and the record of expenses is accurate.

5. Tax Residency Planning

If the HNI owns properties in multiple states, Tax Residency planning is what can be considered. The income tax rates tend to be different across various US states, wherein in some places the rates are high while others do not have state income tax at all.  

Some of the states that do not have income tax at all include:

• Florida
• Alaska
• New Hampshire
• Nevada
• Tennessee
• South Dakota
• Washington
• Texas
• Wyoming

If HNIs own property in any of these states, they can make it their primary residence and save on their taxes.

6. Invest in Tax-Free Income Avenues

HNIs can also invest in tax-efficient avenues such as funds that are not traded actively. This can help lower income tax since such funds create less short-term capital gains, which can help reduce the taxable income of the HNIs.

Health Savings Accounts, Tax-Exempt Mutual Funds, Municipal Bonds, and 529 Education Savings Plans are some of the tax-free investments that HNIs can make.

7. Contributing the Maximum to 401(k)

Another way to lower the taxable income of HNIs is to help them contribute the maximum to 401(k) savings account. This is a plan whereby employees can contribute to their account, which cannot exceed $23,000 or $30,500 if the HNI age is 50 or more in 2024. The amount that can be contributed is controlled by the IRS and updated each year, therefore, an eye on the same should be kept to maximize benefits.

8. Increasing Tax Deductions and Credits

A promising way to reduce taxes includes employing tax deductions and a credit strategy. For tax deductions, deciding whether to go for standard deductions or itemized deductions is of paramount importance. The standard deductions vary per person and change each year. Under itemized deductions, HNIs can avail themselves of medical expenses, state and local taxes, interest payments and can deduct expenses that are related to their investment such as mortgage interest, insurance, and property taxes to name a few.

In addition, HNIs can also go for Bunching deductions wherein several years’ deductible expenses are grouped into a single year. Accelerating deductions can be employed too, which allows taking advantage of the current year deductions.

Under tax credits, HNIs can reduce their childcare costs with the Child and Dependent Care tax credit which can be up to 35% of eligible expenses depending upon the income. Apart from this, the American Opportunity Tax Credit can help reduce tuition and other education-centric costs by as much as $2,500 per eligible student. Similar to this is Lifetime Learning credit, which is yet another way to reduce tuition and education-related costs by up to $2,000 for every eligible student.

9. Retirement Planning and Contributions

A prominent way to optimize tax benefits is by focusing on retirement planning and contributions that can be made. This includes contributing to employer-based accounts like 401(k), and 403(b), which helps in lowering the taxable income. This happens because the money deposited is not liable to taxation until withdrawn, which if withdrawn from 401(k) when retired significantly reduces the tax burden as that time the HNI will not be drawing any salary.

In other words, they will be in a lower tax bracket whereby their income would be taxed at a far lower rate when withdrawn post-retirement in contrast to while being in the earning phase. The advantage can be maximized by contributing more to such retirement accounts. 

Apart from this, the Simplified Employee Pension Plan (SEP) can also be considered as it offers a sizeable income source at retirement by enabling employers to keep money aside in retirement accounts both for themselves and for their employees. The SEP plan allows a contribution of up to 25% of each employee’s pay and does not have an operating or start-up cost like conventional retirement plans.  

In addition, the Salary Reduction Simplified Employee Pension Plan (SARSEP) can also be focused upon, which is yet another strategy that allows employee salary reduction contributions under certain parameters, which are subject to change.  

HNIs can also go for the Savings Incentive Match Plan for Employees (SIMPLE IRA) which enables employers and employees to contribute to conventional IRAs that are set up for employees. This can be established easily with the adoption of Form 5304-SIMPLE, and Form 5305-SIMPLE. 

In this, the employer is required to give every year either a matching contribution of as much as 3% of compensation or 2% of a nonelective contribution pertaining to each employee who is eligible for the plan.

 

Final Thoughts

By keeping a proactive approach combined with effective tax strategies CPAs can help high-net-worth individuals reduce their tax burdens and maximize financial growth. The mentioned prudent tax strategy if employed can help HNIs efficiently manage their wealth, while also paving the way for traversing the complex US tax landscape seamlessly.

If you are on the lookout for an expert partner who can assist you with your client’s tax planning, your search ends right here with us. At Infinity Globus, we extend comprehensive outsourced tax services that can alleviate your burden and help navigate your client’s tax challenges efficiently.