If you're a high-net-worth individual in the United States, you face unique tax planning challenges due to your substantial assets and income. Implementing effective tax planning strategies is crucial to minimize your tax liabilities and protect your wealth. In this article, we'll discuss some of the top tax planning strategies for high-net-worth individuals.
Maximize Retirement Contributions
One of the most effective tax planning strategies for high-net-worth individuals is to maximize retirement contributions. Contributions to retirement accounts, such as a 401(k) or IRA, are tax-deductible and can help to reduce your taxable income. Additionally, investment earnings in retirement accounts grow tax-free until they are withdrawn, which can result in substantial tax savings over time.
Charitable giving is another effective tax planning strategy for high-net-worth individuals. Charitable donations are tax-deductible, which can help to reduce your taxable income. Additionally, donations of appreciated assets, such as stocks or real estate, can provide additional tax benefits. One effective charitable-giving strategy for high-net-worth individuals is establishing a donor-advised fund (DAF).
Use Tax-Advantaged Investments
Tax-advantaged investments, such as municipal bonds or qualified opportunity zone investments, can provide tax benefits for high-net-worth individuals. State and local governments issue municipal bonds and are generally exempt from federal taxes. Additionally, some municipal bonds are also exempt from state and local taxes, which can provide additional tax savings.
Consider Lesser Known, "Advanced" Planning Strategies
Advanced planning strategies, such as death benefit-only plans, monetized installment sales, and private insurance programs, can allow high-net-worth business owners to reduce their tax liability and often “squirrel away” additional money on a tax-advantaged basis.
Consider Estate Planning
Estate planning is another important tax strategy high-net-worth individuals. Proper estate planning can help to minimize estate taxes and protect your assets for future generations. One effective estate planning strategy for high-net-worth individuals is to establish a trust.
Review Business Structure
High-net-worth individuals who own businesses should also review their business structure as part of their tax planning strategy. The type of business structure you choose can significantly impact your tax liabilities. Additionally, high-net-worth individuals who own businesses may be eligible for certain tax breaks, such as the qualified business income (QBI) deduction.
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