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Tax Planning for High Net Worth Individuals

Tax planning for high net worth individuals is essential to ensure they get the maximum benefit from their wealth without losing a big proportion of it to taxes. You may be wondering, “Who pays the most taxes, rich or poor?” Generally, high net worth individuals pay the most taxes. Since you are paying the most, you also get to save the most by employing intelligent tax planning strategies. What’s even better is that many financial and wealth advisors can help you implement high net worth tax planning strategies. If you have liquid assets worth $5 million or more, you should solicit 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 various tax-saving techniques. 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 need to know who a high-net-worth individual is in the first place. The term high net worth is primarily used by institutions providing financial services to designate their most affluent clients.

Even though 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 — money kept in banks, stocks, bonds, and mutual funds, for example. This does not include assets like durable goods, a primary residence, or collectibles. Professionals from the financial sector usually classify wealth in the following three ways:

  • 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 starting from $5 million to $30 million.
  • Ultra-high net worth individuals Individuals who have liquid assets worth $30 million or higher.

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?

If you’ve asked yourself, “how can I reduce my taxable income in 2022?”, then tax planning strategies are essential for you. Tax planning involves reviewing a financial situation or plan to ensure that all the elements work in concert to help you pay the least amount of taxes. Strategies that minimize your tax obligation are said to be tax-efficient.

Tax planning is a crucial element of every high net worth individual’s financial plan. Minimizing your tax burden and maximizing your investments and contributions to a retirement fund play a major role in helping you attain 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, the combination of investments and the types of retirement strategies also need to be aligned with the person’s tax filing status and deduction to attain the highest possible results.

Benefits of Tax Planning for High Net Worth Individuals

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 obligations for wealth tax, income tax, capital gains tax, along with other taxes on your investments, savings, assets, and pensions.

If there’s a tax-efficient way to secure your capital and assets, you should surely see if it works for you. Nevertheless, many high net worth taxpayers fail to do so and ultimately pay more in taxes than they have to. 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 could be missing out on other tools available in your state of residence, which could reduce your tax bill.

2. Lower Tax Obligation for Your Heirs and Beneficiaries

It is a simple fact that 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 might be able to lower your beneficiaries’ inheritance tax obligation. For instance, having the right life insurance plan can be an incredibly tax-efficient practice when it comes to estate planning.

Ideally, you should use a strategy that reduces your inheritance taxes while also providing tax-efficient income and investment growth. If you would like 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 allowing investment returns to exceed the cost of living.

At the end of the day, what matters is calculating the value of investments in real returns, once all the expenses, costs, taxes, management fees, and inflation have 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 always make sure that your investments are correctly allocated and diversified, and your portfolio is specifically designed to match your financial goals, situation, requirements, investment horizon, and risk tolerance. If you are an investor with $10 million or more in investable assets, you can find out about 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 because of taxes that you could’ve lowered or avoided altogether.

Tax Planning Strategies for HNW Individuals

Many wealthy individuals wonder how, as high net worth individuals, they can 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 would like a detailed account of various 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 cut down on their tax bills.

But the questions that come up are, “What is a tax loophole?” and “How can I reduce my taxable income in 2022?” Well, one way is by making contributions to a 401(k), IRA, Health Saving Account, for example.

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 simple words, you can lower your taxable income by making contributions to a 401(k) or saving account created by your employer.

A Health Savings Account is a tax-deferred saving account that you can use for healthcare expenses at any time. If you contribute money to your HSA, it’s considered a tax deduction, which ultimately lowers your taxable income.

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

Another way that wealthy people use to reduce their taxable income is to increase their taxable deductions throughout the year. Some examples of taxable deductions are charitable deductions, gifts, state taxes, personal property taxes, investment expenses, job-related expenses, and interest paid on your home mortgage.

These deductions add up over the years, which is why you should maintain an itemized list of expenses all through the year, along with any receipts. You can also make 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 from selling a non-profitable investment to purchase other investments that have a higher chance of growing and helping you recover your wealth. You can then use the future profits to balance out the losses, thus creating a thriving 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 an Excel spreadsheet. Now, it is relatively easy as a lot of the work is done by software and handled by your financial advisor.

Recently, our team helped a client save over $30,000 worth of taxes only by managing their losses and gains. If you have $5+ million in investments and would like 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.

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 total tax bill, which can significantly reduce your taxes.

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

In addition, you can 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 this is a low tax bracket year for you. In such conditions, the best thing to do is to report income sooner than what you had initially planned.

5. Work with a Tax Advisor

Certain events in your life can have a huge impact on your financial circumstances in terms of your tax liability. These can involve divorce, marriage, unemployment, or 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 employing 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 your taxes.

Final Thoughts

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

At Pillar Wealth Management, we realize that your financial objectives require more than just 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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