Ten Tax Planning and Mitigation Strategies for High-Net-Worth Individuals

This article is reprinted with permission from Esq. Wealth Management, Inc.

At EsqWealth, we understand that your wealth is more than just a number. It’s a reflection of your hard work, your accomplishments, and your aspirations for the future. That’s why we believe in taking a proactive approach to tax planning, ensuring that you keep more of what you’ve earned.

Tax planning is an integral part of our wealth management strategy. We recognize that reducing your tax burden can be complex, particularly for high-net-worth and ultra-high-net-worth individuals with intricate tax returns and investments. Through meticulous planning, we aim to minimize your tax liability, thereby maximizing your wealth and helping you achieve your financial goals.

Effective tax planning isn’t a once-a-year task; it demands consistent attention. While your accountant undoubtedly plays a significant role in this process, your financial advisor can provide additional value by recommending tax-efficient investment strategies throughout the year.

Tax planning involves a comprehensive examination of your financial situation, incorporating strategies to lower your overall tax bill through careful planning around income, purchases, investments, and other strategies. Strategic tax planning can also enhance your estate and offer more flexibility for your heirs. For instance, as part of your tax plan, you might distribute portions of your wealth to family members as tax-free gifts or establish an irrevocable trust to lessen the federal tax burden for those who inherit your estate.

While there are many tax mitigation strategies, here are ten that you might consider. Working with a financial advisor can help optimize these strategies, regardless of your level of financial sophistication.

1. Generating tax-free income: Perhaps the best way to minimize your taxes is to generate income that is tax-free. Contributions to a Roth Individual Retirement Accounts (IRA) are made with after-tax dollars, and both contributions and earnings can be withdrawn tax-free in retirement, provided certain conditions are met. Contributions to a Health Savings Account (HSA) are tax-deductible, and withdrawals for qualified medical expenses are tax-free. Municipal bonds are securities sold by governments to fund their obligations. The interest you earn from these bonds is generally not subject to federal, state, and local taxes if you live in the locality where the bond was issued.
2. Utilizing tax-efficient investment vehicles: You may consider the impact of contributions to tax-deferred savings accounts like 401(k)s, IRAs, and Defined Benefit Plans. The contributions you make to these accounts are often tax-deductible, reducing your taxable income. There are also tax benefits by investing in 529 plans to pay for educational and related expenses. You may also want to explore the benefits of a backdoor Roth IRA strategy for high-income earners.
3. Placing investments in tax-advantaged accounts: Consider the tax effect of holding short-term capital gain investments and non-qualified dividend investments in a tax-deferred account (such as an IRA or a defined benefit plan) as opposed to holding those investments in a taxable account. These investments are taxed at the investor’s ordinary income tax rate, which can be higher than the long-term capital gains rates. By holding these investments in a tax-deferred account, you may benefit from lower tax rates upon withdrawal, especially if you fall into a lower tax bracket in retirement. In addition, the ability to reinvest dividends and the full amount of any capital gains without current tax implications can lead to greater compounding growth over time. Moreover, you may have the flexibility to plan withdrawals from tax-deferred accounts strategically, potentially minimizing your tax liability based on your income needs and tax situation at the time of retirement.
4. Gift and inheritance strategies: Gifting during your lifetime can be a powerful way to reduce estate taxes. The IRS allows for a certain amount to be gifted each year per recipient without incurring a gift tax. Consider leveraging techniques such as grantor retained annuity trusts (GRATs) or family limited partnerships (FLPs) for more sophisticated gifting strategies.
5. Long-Term Capital Gains: If you hold a capital asset for longer than one year, the capital gain is taxed at a preferential rate of 0%, 15%, or 20%, depending on your income level. This is significantly lower than the tax rates for short-term capital gains. Implementing a tax-efficient investment strategy that focuses on long-term capital appreciation can help minimize your tax liability.
6. Entity Structuring: The way your business entity is legally constituted, held, and distributes income can have significant tax implications. Consider structuring your business as an S corporation or limited liability company (LLC) to take advantage of pass-through taxation and other tax benefits.
7. Pre-Tax Expenditures: Paying for expenses with pre-tax dollars can help reduce your taxable income. Maximize deductions for business expenses, including home office deductions for self-employed individuals. Additionally, consider utilizing employer-sponsored flexible spending accounts (FSAs) or health reimbursement arrangements (HRAs) for eligible healthcare expenses.
8. Charitable giving strategies: You can explore the optimal amount and timing of charitable giving to maximize your deductions from your adjusted gross income. You can also time your charitable gifts to offset other significant taxable events, such as a financial windfall, a salary raise, or a large bonus at work. Additionally, consider establishing a donor-advised fund for more strategic charitable giving.
9. Tax-loss harvesting: While it is never enjoyable to have a loss in an investment, you can consider selling investments that have lost value to realize capital losses that can offset taxable gains. You may consider using the proceeds from the sale to reinvest in similar securities with upside potential. Implementing a systematic tax-loss harvesting strategy can help mitigate taxes over time and improve overall portfolio efficiency.
10. Multi-Year tax planning: A proactive tax plan should go beyond just an annual evaluation and look ahead to your long-term financial goals. A multi-year plan can reduce your tax burden in the long run. Consider implementing strategies such as Roth IRA conversions over several years to manage tax brackets in retirement.

Tax planning involves numerous moving parts, from annual adjustments to IRA contributions to charitable deductions to staying abreast of local tax laws. By working with your trusted financial advisor on year-round tax planning, you can ensure you’re maximizing tax deductions, taking advantage of tax credits, and using tax-efficient investment vehicles effectively.

At EsqWealth, we’re more than just financial advisors. We’re your partners in wealth management, committed to helping you navigate the complexities of tax planning so you can focus on what matters most to you. We strive to ensure you don’t miss any opportunities to reduce your tax bill and will keep up with regulatory changes, making any necessary adjustments to your plan.

The information above is not intended to and should not be construed as specific advice or recommendations for any individual. The opinions voiced are for general information only and are not intended to provide, and should not be relied on for tax, legal, or accounting advice. To discuss specific recommendations for any unique situation, please feel free to contact us.