Optimizing Tax Strategies for High-Net-Worth Individuals

Federal and Arizona State tax law is complex, with a diverse variety of deductions and credits that taxpayers of different types can potentially leverage to their benefit. The types of income a person earns, the value of an earner’s assets, and the categories of investments they hold should influence their overarching tax strategy.

The inherent complexity of the system means there is no single best tax strategy. What’s ideal for one high-net-worth individual may be entirely different from the optimal approach for another. It’s not always easy or accurate to make generalizations about tax optimization best practices, but there are some broad strategies high-net-worth individuals often adopt to maximize their tax savings.

Utilizing Tax-Deferred Accounts Where Possible

Although some types of tax-deferred accounts have income limitations, such as Roth IRAs, even high-net-worth individuals have access to a variety of tax-deferred accounts. The use of tax-deferred accounts can be particularly impactful for retirees who earn a higher income during their working years. They may pay a much lower rate in retirement when they begin drawing income from tax-deferred accounts.

Charitable Contributions

Although not everyone will use charitable donations to reduce their taxable income, it is one of the more widely utilized strategies among high-net-worth individuals. The complexity of charitable contribution strategies can vary greatly depending on the taxpayer’s preferences and income. Some investment tools, like donor-advised funds (DAFs), may allow taxpayers to more easily maximize charitable giving for tax purposes.

Maximizing Deductions and Credits

Professional tax preparation is not reserved solely for high-income individuals and households. Even median earners can potentially benefit from deductions and credits that will reduce their tax liabilities.

Which deductions or credits a high-net-worth individual may be eligible to use will depend on the sources of their income and the types of business expenses they have. The complexity of tax law can make it difficult for the average taxpayer to identify all their potential credits and deductions on their own and use them correctly to avoid running afoul of the IRS. Professional tax preparation assistance provided by accounting professionals experienced with high-net-worth individuals is advisable.

Optimizing Capital Gains

Capital gains tax rates are significantly lower than income tax rates for high-net-worth and high-income individuals and households. There are only three brackets for capital gains rates compared to seven income tax brackets.

The rate for long-term capital gains, which is dependent on the taxpayer’s income, is either 0 percent, 15 percent or 20 percent. Short-term gains are taxed as regular income at the earner’s higher income tax rate.

How long an investor holds on to assets before selling is highly dependent on their financial situation and the performance of the investment, but as a general rule it’s preferable to pay the lower long-term capital gains rate rather than the income tax rate on the proceeds of investments.

Trust and Estate Planning

Estate planning and the formation of trusts is often central to the tax optimization plans of high-net-worth individuals. There are more than a dozen types of trusts, from grantor retained annuity trusts (GRATs) to bypass trusts that allow couples to maximize federal estate tax exemptions. You don’t need to be extraordinarily wealthy to optimize tax planning by leveraging trusts. Even low- or moderate-income savers can make use of wisely crafted estate planning tools to reduce estate taxes.

High-net-worth individuals can use a variety of trusts and estate planning tools in creative combinations to reduce their taxable income and assets, even during their working years. It’s best to consult with experienced estate planning professionals to develop a dependable plan that will provide long-term protection with the ideal level of control and access for your situation.

Income Shifting and Gifting Strategies

Some high-net-worth individuals may benefit from income-shifting strategies, which may entail gifting assets to family members in a lower tax bracket or leveraging family limited partnerships to reduce their taxable income. It’s important income shifting strategies are implemented with the help of experienced accounting professionals who can ensure everything is done within the boundaries of tax laws and regulations.

Professional Assistance Is Key for Optimizing Tax Strategies

Tax law in the United States is extraordinarily complex, which is why high-net-worth individuals often work with experienced tax preparers and financial planners to develop thorough plans. Periodically consulting with your tax preparer and financial planning advisors can help ensure your wealth is consistently optimized and maintains compliance with the latest laws and regulations.  



Our Financial Advisors Excel at Helping High-Net-Worth Households Protect Their Assets

The team at Fullerton Financial Planning take a holistic approach to investment management and retirement savings. Our financial advisors help savers develop comprehensive plans that incorporate estate planning, tax strategies and portfolio management to provide long-term financial security and peace of mind. Schedule a free consultation today by calling (623) 974-0300.