High-net-worth individuals (HNWIs) typically face higher tax rates and a more complex filing process during tax season. However, they also tend to enjoy more flexibility with tax planning options.
The U.S. tax code is vast, offering numerous strategies for high-net-worth individuals. Without the right expertise, choosing the best plan can be challenging.
Set yourself up for success by partnering with a highly qualified tax advisor. An advisor can offer personalized advice, help uncover potential tax strategies in the short term, and set your estate up for success over the long run.
Do You Need Tax Planning Or Estate Planning?
Tax planning is the process of properly filing your annual tax return. This is a fairly straightforward process that every American must complete every year. Estate planning, however, is a bit more complex.
Estate planning is a comprehensive process that involves determining how your assets will be preserved and distributed after you’ve passed on. Although tax filing is still a part of the process, it also includes longer-term taxes like estate and inheritance taxes.
Estate planning ensures that the wealth you’ve built will be passed on to your children, family, or friends—instead of ending up in Uncle Sam’s pockets. If you need help with estate planning, you can schedule a consultation with experienced estate planning advisors to walk you through the process.
Strategy 1: Make Sure Your Investment Accounts are Maxed Out
Maxing out your investment accounts is a good starting point for all taxpayers, not just those in the high-net-worth tax planning bracket. Contributing to eligible retirement accounts can reduce taxable income and build wealth over time. Here are eligible retirement accounts that you can contribute to:
- Individual Retirement Account (Roth & Traditional): As of 2024, the IRS allows you to contribute $7,000 to any Roth or traditional IRA account ($8,000 if you’re 50 or older). Keep in mind there are income limits to qualify for a Roth IRA that can be discussed at length with a financial advisor.
- Employer-sponsored retirement accounts: Employees at any company can contribute to these retirement plans. As of 2024, the IRS allows you to contribute $23,000 to any employer-sponsored account, including 401(k)s, 403(b)s, and 457 plans. Employees over 50 can also contribute a catch-up contribution of $7,500.
Although contributing to a retirement account is a good starting point, it likely won’t make a huge dent in your tax bill if you have a sizable nest egg in the bank.
Strategy 2: Leverage Gifting (Rules Ending in 2025)
Gifting is another highly effective way to reduce your tax bill, especially if you plan to pass down the bulk of your estate. As of 2024, individuals can gift up to $18,000 ($36,000 for married couples) completely tax-free to as many recipients as they want (the recipient will not have to pay taxes).
- Single Filers: You can gift up to $18,000 to a child, another $18,000 to your cousin, another $18,000 to your friend, and so on without paying any taxes.
- Married Couples: You can gift a combined $36,000 to any children, another $36,000 to other family members, another $36,000 to your neighbor, and so on.
These gifts are not tax deductible (unless they are charitable donations to qualified charities). However, sending financial gifts each year can reduce the value of your estate and potentially lower your tax bill – especially over a decade or two. It also helps ensure that your friends, family, and children receive their share of your estate before being spread into taxes.
Taxpayers who give more than $18,000 must legally file a gift tax return (Form 709) with the IRS. However, they won’t owe any taxes due to the lifetime gift tax exemption.
What Is the Lifetime Gift Tax Exemption?
The lifetime gift tax exemption is the amount of money or assets that the government allows you to give away over the course of your life without being taxed. As of 2024, the lifetime gift limit is $13.61 million per person or $27.22 million per married couple. However, this exemption is set to drop dramatically at the end of 2025.
Pending Reduction to the Lifetime Gift Tax Exemption
Reducing your tax bill via gifting should be done sooner rather than later. The Tax Cuts and Jobs Act of 2017 nearly doubled the national tax-free gift limit. However, this tax provision is set to expire at the end of 2025. The total gift limit will drop to roughly $7 million—roughly half of what it is now.
To start taking advantage of this tax reduction strategy today, schedule a consultation with one of the financial planners on the ARQ Wealth team for guidance and strategy.
Strategy 3: Consider Donating to Charity
Charitable donations are another cornerstone of high-net-worth tax planning. This method can reduce your taxable income while also making a positive impact on the world.
Unlike gifts, donations to qualifying charities are typically tax deductible. Taxpayers can deduct up to 60% of their annual contributions from their adjusted gross income. Not sure if your desired charity is a “qualifying” charity? Try searching for it using the IRS Tax Exempt Organization Search Tool or speak to an experienced tax advisor.
The most common way to donate to a charity is with cash. However, it’s important to remember that you can donate lots of different assets, such as:
- Stocks and bonds
- Donations from an IRA
- Real estate and land
- Cars, boats, or other vehicles
- Patents, copyrights, trademarks, and other intellectual property
- Business inventory
- Valuable collectibles
You can also double-dip on tax savings using select charitable donations. For example, one of the best high-net-worth tax strategies is donating stocks to charity. This allows you to gain a tax write-off for your donation while avoiding capital gains taxes on any investment gains.
Another popular donation high-net-worth tax planning strategy is “bunching” your donations. Bunching involves making two years’ worth of donations in one year and then itemizing your deductions on your tax bill to maximize your write-offs, helping maximize your reductions.
Strategy 4: Harvest Your Investment Losses
Every investor hopes their portfolio will always go up and to the right. Unfortunately, the reality is that every investor’s portfolio dips down now and then. The good news is that you can use these dips to offset any potential gains and lower your tax bill—a strategy known as tax-loss harvesting.
The U.S. taxes investors on their capital gains. For example, if you invest in a stock and gain a $50,000 return, then you’ll have to pay a capital gains tax when you sell that stock. However, you can also use your investment losses to offset gains.
If your investment in Stock A gained $50,000 but you had an investment in Stock B that lost $30,000 then you can sell Stock B and use those losses to offset your gains from Stock A – meaning you’d only owe taxes on $20,000 ($50,000 – $30,000 = $20,000). You can even use capital losses to offset up to $3,000 of ordinary income (if your investments lose more than they gain throughout the tax year). You can carry capital losses forward to offset $3,000 worth of income in future tax years.
Tax-loss harvesting can get complicated, especially if you have a sizable portfolio or make a lot of trades throughout the year. This is why working with a tax professional is your best choice. Their experience will help you maximize any investment losses.
Strategy 5: Leverage Trusts & Foundations
If you haven’t already done so, allocating your financial assets to a trust or foundation can significantly minimize your tax liability. These legal entities provide much greater flexibility for filing your taxes, including:
- Defer taxes
- Reduce estate tax exposure
- Take advantage of charitable tax deductions
- Shield your assets from creditors, lawsuits, and other liabilities
A trust is a legal entity that helps your estate stand on its own (instead of being tied directly to you). In this sense, it’s similar to how business owners use an LLC that “owns” their business. This provides greater flexibility, control, and protection for everyone involved.
Strategy 6: Take Advantage of International Tax Planning
A less common high-net-worth tax strategy is to take advantage of favorable tax regulations in foreign countries. This works well for those who have an international presence.
These are all examples of when it makes sense to explore international tax planning strategies:
- If you own property in another country
- If you own a business that operates in another country
- If you or your spouse has family in another country
- If you travel frequently to another country for work or leisure
In any of these scenarios, making a minor tweak to your tax structure could help you save on the tax bill. For example, a HNWI could establish residency or domicile in a tax-advantaged country. They could also consider expatriating from the United States.
There is nothing illegal about taking advantage of tax benefits offered by other countries. However, many common mistakes can be avoided with the help of an experienced tax professional.
Strategy 7: Consistently Update Your Plan
Tax planning is like getting into good shape—you’ll need to work out more than once to stay fit. It’s a process that requires constant attention and effort throughout the year.
Being tax-diligent all year will make it easier to take advantage of tax benefits as they come along. At the very least, you’ll be fully aware of your estimated tax payments due in April.
Consistently updating your tax plan is especially important when your circumstances change during the year, which is incredibly common. For example, in just one year, you could:
- Get married or divorced
- Welcome a new child
- Buy or sell new properties, assets, or businesses
- Move to a new location
- Have a dramatic change in your health
Plus, there are external factors to consider. For example, new legislation could be signed that offers new tax advantages or removes old ones.
However, if you’re like most people, you likely don’t have the time to manage your tax obligations 24/7. This is why so many people choose to work with a tax professional.
If you’re interested in receiving personalized tax advice on minimizing your tax bill, schedule a consultation with one of the financial planners on the ARQ Wealth team today. ARQ Wealth manages a combined $555 million in assets under management, and each advisor has an average of 15 years of experience.
