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High Net Worth Tax Planning Strategies to Use

It’s a well-established fact that high net worth individuals pay the most taxes. But since you pay the most, you can save the most through intelligent tax planning strategies. Even better, financial and wealth advisors can help you define and implement high net worth tax planning strategies. If you have liquid assets worth $5 million or more, you should request a free copy of our recent book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning to get detailed information on some useful tax-saving techniques.

At Pillar Wealth Management, we are proud to offer a vast range of fiduciary financial advisory services to individuals who have $5 million to $500 million in liquid assets. We have over six decades of combined experience in helping high and ultra-high net worth clients implement tax-saving strategies. Visit our website to sign up for a free video consultation with us.

What Is a High Net Worth Taxpayer?

To understand who a high net worth taxpayer is, we first need to know who a high net worth individual is. The term high net worth is primarily used by institutions providing financial services to designate their most affluent clients.

Although there is no formal definition of high net worth individuals, it is commonly agreed that these people have liquid assets worth $1 million or higher. The criteria for high net worth are generally understood to encompass liquid assets — such as money kept in banks, stocks, bonds, and mutual funds. These do not include assets like durable goods, a primary residence, or collectibles. Professionals in the financial sector usually classify wealthy individuals in the following three groups:

  • High net worth individuals – Individuals who have liquid assets starting from $1 million going up to $5 million.
  • Very high net worth individuals – Individuals who have liquid assets from $5 million to $30 million.
  • Ultra-high net worth individuals – Individuals who have liquid assets worth $30 million or more.

In light of these classifications, we can infer that a high net worth taxpayer is basically a high net worth individual.

What Is Tax Planning?

Tax planning involves reviewing q financial situation or plan to ensure that all of its elements work in concert to help you pay the lowest amount in taxes. Strategies that minimize your tax obligation are known to be tax-efficient.

Tax planning is a crucial element of every high net worth individual’s financial plan. Minimizing your tax burden, maximizing your return on investments, and contribution to retirement funds play a major role in your attaining financial success.

Effective tax planning entails various considerations, including the timing of income, the size and timing of purchases, and planning for other expenses. In addition, your mix of investments and retirements strategies need to be aligned with your tax filing status and deductions to attain the best results.

Benefits of High Net Worth Tax Planning

As a high net worth individual, your primary objective in saving and investing may be to create a source of income, preserve your wealth, or drive growth. Regardless of your goal, tax planning plays a key role in safeguarding your wealth and making the most of what you have.

Here are some important benefits of high net worth tax planning.

1. A Reduced Tax Liability

Let’s begin with the most obvious advantage — reducing your obligation to pay wealth tax, income tax, and capital gains tax, along with any other taxes, on your investments, savings, assets, and pensions.

If there’s a more tax-efficient way to secure your capital and assets, you should surely take a look at it to see if it works for you. Nevertheless, many high net worth taxpayers fail to do so and ultimately pay more in taxes than they should. This might include capital gains tax when switching between different investments or income tax on bank interest that you aren’t even withdrawing.

Moreover, you may be missing out on other tools available in your state of residence that could minimize your tax bill.

2. Lower Tax Obligation for Your Heirs and Beneficiaries

It is a simple fact — the less money you pay in taxes, the more you can spend or pass on to your heirs.

In addition, with some investment portfolios, you may be able to lower the inheritance tax obligations of your beneficiaries. For instance, having the right life insurance policies can be incredibly tax-efficient for estate planning.

Ideally, you should use a strategy that reduces your inheritance taxes while also providing tax-efficient income and investment growth throughout your life. If you wish to learn more about how you can achieve the maximum possible investment performance, be sure to read our useful guide, 5 Critical Shifts for Maximizing Portfolio Growth Strategies.

3. Boost Real Investment Returns

In this global climate of economic fluctuations and long periods of extremely low bank interest rates, effective tax planning plays a major role in ensuring investment returns exceed living costs.

At the end of the day, what matters when calculating the value of investments is real returns, once all the expenses, costs, taxes, management fees, and inflation has been accounted for. For example, real estate is lauded for producing fairly high investment returns in the long run. Still, with the imposition of wealth and capital gains taxes, the tax obligation can be quite high compared to other assets.

When it comes to investing, you should ensure that your investments are effectively allocated and diversified, and your portfolio is aligned with your financial goals, circumstances, requirements, investment horizon, and risk tolerance. If you are an investor with $10 million or more in investable assets, you can discover some of the best investment strategies by reading our book.

If you don’t invest in proper tax planning, your investment returns can be significantly reduced.

How Do High Net Worth Individuals Reduce Taxes?

Many wealthy individuals wonder how to reduce their taxes. The truth is there are plenty of tax-reducing strategies that are helpful for people with millions of dollars, including the ones discussed below.

If you wish to get a detailed account of some advanced tax planning strategies, you should request a free copy of 7 Secrets To High Net Worth Investment Management, Estate, Tax, and Financial Planning, written especially for individuals and families who have $5 million to $500 million worth of liquid assets.

1. Reduce Taxable Income

This is one of the top techniques high net worth taxpayers use to reduce their tax bills.

However, how do they actually reduce their taxable income? Well, one way is by making contributions to their 401(k), IRA, or Health Saving Account.

IRA contributions are tax-deductible contributions made to any of your retirement savings accounts. These deductions do not appear on your tax return as they’re made directly from your paycheck. In other words, you can lower your taxable income by making contributions to a 401(k) or saving account created by your employer.

Health Savings Accounts are tax-deferred saving accounts that you can use for healthcare expenses at any time. When you contribute money to your HSA, it’s considered to be a tax deduction, which ultimately lowers your taxable income.

Being a high net worth investor, a lower taxable income will surely increase your portfolio performance. You can get more information on enhancing your investment portfolio performance in our guide Improving Portfolio Performance.

Another way in which rich people reduce their taxable income is by increasing their taxable deductions throughout the year. Some examples of taxable deductions include charitable deductions, gifts, state taxes, personal property taxes, investment expenses, job-related expenses, and interest paid on a mortgage.

These deductions add up over the years. This is exactly why you should maintain an itemized list of expenses all through the year, along with any receipts. You can also create a simple Excel file and add line items each time there’s a deduction.

2. Use Tax Loss Cultivation

Tax-loss cultivation entails selling specific investments at a loss to offset gains made by selling other investments. Consequently, you only need to pay taxes on your net profit.

You can use the income generated by selling the losing investments to purchase other investments that have a higher chance to grow in the future and help you recover your wealth. You can then use the future profits to balance out the losses, thus creating a positive cycle of tax savings.

The most important thing to understand is that implementing tax loss cultivation isn’t as easy as it sounds. Trying to cultivate tax losses on your own is a labor-intensive and challenging job. Previously, this task was performed using Excel spreadsheets. However, now, it is relatively easy as a lot of the strenuous work is done by software and handled by your financial advisor.

Recently, our team helped a client save over $30,000 worth of taxes simply by managing their losses and gains. If you’ve invested $5+ million and wish to use tax loss cultivation strategies, request a free copy of our new book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning. You can also schedule a video call with one of our wealth managers to get started with tax loss cultivation today.

Tax planner

3. Avail Yourself of Tax Credits

Tax credits are very similar to incentives. They allow you to minimize your tax burden.

Even though tax credits do not have a direct impact on your taxable income, they can be subtracted from your tax bill, which reduces the taxes you need to pay considerably.

There are several things you can do to avail yourself of the benefits of tax credits. For example, you can get credit for buying energy-efficient appliances.

You can also sign up for college courses to further your education. For instance, if you want to learn how to play the flute, you can enroll in a college course and get a tax credit — the Lifetime Learning Credit provides $10,000 per household to use for college credits each year, where you’ll get 20 percent in tax credits.

4. Pay Some Taxes Instantly

Another great strategy to reduce your taxes is to pay certain taxes immediately as it will cost less than deferring them to another year. This is especially true if you are in a low tax bracket year. In such conditions, the best thing to do is to register income sooner than what you had initially planned.

5. Work with a Tax Advisor

Certain life events can have a huge impact on your financial circumstances in terms of your tax liability. These include divorce, marriage, unemployment, and receiving an inheritance.

For assistance on such matters, many high net worth individuals choose to work with a skilled and experienced tax advisor. These advisors help affluent individuals attain their financial goals by using strategies that are suited to specific circumstances.

Just make sure you choose someone who can help you throughout the year, not just when your taxes are due. Consider working with an advisor who can represent you before the IRS in case you’re audited. Head over to our website to speak to the advisors at our firm and learn how we can help you reduce taxes.

A Few Last Words

If you wish to secure and build your wealth, it’s imperative that you use high net worth tax planning.

At Pillar Wealth Management, we acknowledge that your financial objectives require more than just the maximum investment performance. Therefore, we believe that tax planning is an indispensable component of cost control and attaining financial success. Book a free meeting with one of our wealth advisors to start with high net worth tax planning!

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