Tax Strategies for High Net Worth Individuals

Everyone wants to save money on taxes, especially high net worth individuals, who are typically hit harder than most other income groups. Bearing this in mind, it makes sense that they’re constantly looking for ways to minimize their tax burden. That being said, no single tax strategy can fit all scenarios. Different individuals have different tax situations, and each of them requires a personalized plan. If you’re a high net worth individual looking to formulate such a plan, you’ll need an experienced wealth management firm like Pillar Wealth Management, which specializes in serving investors with $5 million to $500 million in liquid assets. If your wealth exceeds $5 million, you can start with our guide titled 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning.

STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION

 

7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning

 

The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.

Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.

For now, this guide will walk you through some valuable tax strategies for high net worth individuals for 2022:

Tax Strategies for High Net Worth Individuals

Hold on to Investments for More Than a Year

Investing in stocks

Investments are a great way to boost your long-term wealth, but you can’t ignore their tax implications. While no taxes are applied to assets you hold, when you sell an investment, and there’s a profit on it, a capital gains tax is triggered.

Capital gains tax is a tax paid on the profit you make from the sale of investments such as shares. You might now be wondering, “What is the capital gains tax for 2022?” The amount of tax paid on these gains is determined by the duration the asset was held. Any capital gain you earn on the sale of an asset within a year from the date of purchase is taxed at the same rate as ordinary income, including the 37%, 35%, 32%, 24%, 22%, 12%, and 10% tax brackets.

As a high net worth individual, your capital gains may be substantial. Any short-term capital gain exceeding $523,600 will be subject to a hefty 37% rate.

Hence, it’s best to choose your investments wisely and hold on to them for more than a year. This is because assets held for more than a year are subject to capital gains tax rates of 0%, 15%, or 20%, depending on the level of income. So, just by holding on to your investments, you end up paying way less in capital gains tax than otherwise. To learn more about how to save on investment taxes, seek a video consultation meeting with our wealth managers at your convenience.

Leverage Tax-Loss Harvesting

If you invest in taxable brokerage accounts, tax-loss harvesting should be a great strategy for you. It can either minimize or completely eliminate capital gains tax. But how exactly does it work?

Tax-loss harvesting has to do with balancing capital gains with losses. Capital gain is generated when you sell an investment asset such as an ETF or mutual fund for more than its purchase price. But if the sale price is lower than the purchase price, you’d incur a capital loss.

As explained earlier, you will pay capital gains tax if you make any profit. Suppose you sell off another asset and realize capital loss by the same amount, the profit and loss will offset each other, so you will no longer owe the capital gains tax.

Plus, if you only make a capital loss and fail to make any capital gain, you should be able to reduce your taxable income by the loss amount. However, you can reduce the taxable income by up to $3,000. If your net losses (losses minus gains) exceed $3,000 in a particular year, you can carry forward your unused loss into the future tax year. If you’re a high net worth investor with more than $10 million in liquid assets, learn how you can save on the taxes you pay on investments by studying this book.

Income Acceleration or Deferral

Payroll

Accelerating or deferring your taxable income can reduce your exposure to income tax and the 3.8% Medicare surtax and capital gains tax on investment income. When considering income deferral, keep in mind that it’s about implementing a long-term deferral strategy that enables you to compound your investments and savings faster than otherwise.

Also, note that the current tax rates are set to expire in 2025, so the income you’re deferring for tax benefits may be taxed at a high rate afterward. What you should do depends on your situation.

For example, if your commission income is skyrocketing this year, your taxable income may be more this year than next year. Request that your employer defer to 2023 any commissions you expect to receive near the end of 2022. This way, your taxable income for 2022 will transfer to a lower tax bracket, thereby reducing your tax bill. Since you expect to receive lower commissions next year, the deferral won’t hurt your tax implications in 2023 either.

Similarly, you can consider non-qualified deferred compensation contributions if your employer offers a deferred compensation plan. This involves decreasing your taxable income this year to build your post-retirement savings. To obtain a deeper understanding of income deferral or acceleration, schedule a video consultation with our wealth managers at your convenience.

Make the Most of Estate and Gift Taxes

The Trump government implemented changes to the gift and estate tax rules, which had direct implications for high net worth individuals. The regulations actually doubled the generation-skipping transfer, gift, and estate tax implications. For instance, although the 40% tax rate for all three remained unchanged, the estate tax exemption for 2022 is $12.06 million per individual, and the gift tax yearly exclusion limit is $16,000 per person.

Over the past few years, the increase in lifetime gift tax exemption, which encompasses both generation-skipping tax exemption and estate tax exemption, has allowed high net worth individuals to pass on more of their wealth to their descendants tax-free. If you’re among those with more than $5 million, study our book titled 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning.

Hence, if you’re a high net worth individual, the increase in lifetime exemption limits means you have a greater opportunity to leave wealth behind for your children while keeping your tax burden to a minimum. To make the most out of the tax changes, take the time to see if your estate plan is structured so that you benefit from the higher estate tax limit and, at the same time, ensures you don’t pass on more or less wealth to your children, grandchildren, or spouse than you want.

Also, be sure to coordinate your federal estate tax strategies with tax implications at the state level.

Incorporation

If your high net worth includes ownership of one or more businesses, this can be a great tax-saving strategy for you. Owning an incorporated firm enables you to keep funds within the structure of the company, where there is preferential tax treatment. As opposed to the more than 50% personal tax rate that applies to solo traders, the tax rate for small businesses is considerably lower at around 9% to 13%.

Moreover, depending on the type of business you own, you get significant tax deferral opportunities, not to mention the capital gains exemption from which owners of incorporated businesses benefit.

Similarly, if you hold real estate assets in excess of $600,000, with your global assets exceeding $11.7 million, you’ll be liable for estate tax. On the other hand, holding the same properties through a corporation mitigates US estate tax concerns.

However, you should become familiar with the accounting and legal requirements of setting up a corporation. Some of the documents to prepare include articles of incorporation, shareholder agreements, tax returns, and annual financial statements and reports. These also add to the costs of the decision. To learn more about how an incorporated business saves on taxes, schedule a video consultation with our wealth managers.

Use Above-the-Line Deductions

Permissible whether or not you take the standard deduction or itemize, above-the-line deductions are designed to reduce taxpayers’ adjusted gross income (AGI). A reduced AGI may qualify you for additional credits or deductions on your return. If you’re a high net worth individual, you may benefit from the above-the-line deductions described below. You may also find them in our guide titled 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning, which is targeted to individuals with at least $5 million in liquid assets.

  1. Qualified Charitable Distributions (QCD): Paid directly from an IRA to a qualifying charity, this distribution stems from an IRA of a person aged 70½ or above. This way, you should be able to donate to your favorite charity from your IRA tax-free. If you’re charitably inclined, a QCD can save you thousands of dollars in taxes.
  2. Deductible Traditional IRA Contributions: Depending on whether you have access to a group retirement plan, contributions to traditional IRAs can be deducted with various income thresholds. There should be no income limit for taking the deduction if you and your significant other don’t have access to a group plan. The Modified Adjusted Gross Income (MAGI) limit to deduct contributions for a single filer who has access to a group retirement plan is $68,000 to $78,000. For a married couple with one spouse having access to a group plan, the MAGI limit is $204,000 to $214,000. With both spouses having access to a group retirement plan, the limit is $204,000 to $214,000.
  3. Health Savings Account Contributions: These are tax-deductible contributions for which the money will grow tax-free and the withdrawals are tax-free for any expense for those who are aged 65 or above or for qualifying medical expenses for those under 65. For 2022, the contribution limits are $7,300 for families and $3,650 for individuals. You may also contribute an additional $1,000 if your age is 55 or above.
  4. Qualified Retirement Plan Contributions: To attract talent, many companies offer a qualified retirement savings plan like a 401(k), 457, and 403(b), which can be the easiest way to reduce your tax bill as an employee. The reductions won’t appear on your tax return because they’ll have been made directly from your paycheck. Hence, the pre-tax retirement plan contributions are deducted from the income mentioned on your IRS form 1040.

Conclusion

While careful tax planning is crucial for everyone, when you’re a high net worth individual, doing everything right becomes even more critical. By leveraging the aforementioned tax strategies, you should be able to preserve more of your wealth and earnings over time.

In the end, you’ll provide a generous financial legacy for your children and grandchildren via estate planning. We hope this guide helps you minimize your tax burden in 2022. If you need professional help in managing your wealth in a tax-efficient way, reach out to Pillar Wealth Management, a high-profile wealth management firm that specializes in serving affluent investors holding $5 million to $500 million in liquid assets. To hire a wealth manager or financial advisor, schedule a video meeting with us at your earliest convenience.

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