Tax planning considerations for high-net-worth individuals

By Larry Jones, CPA/PFS, CGMA^® and Dan Griffith, CEPA^®, Director of Wealth Strategy

Building a financial portfolio of at least $1 million in assets is certainly an achievement, but to maintain and increase that wealth may require thoughtful tax planning and preparation. And those households, considered ‘high-net-worth individuals’ (HNWI), often have substantial wealth spread out among various investments that could benefit from tax-reducing tactics.

Tax minimization strategies

HNWI with taxable incomes greater than $578,125 ($693,750 for married couples filing jointly) will find themselves in the highest tax bracket–paying 37% in tax on their income above this threshold^†. Therefore, if you fall in this tax bracket, it would be wise to consider the implications taxes will have on your bottom line, and the tax-planning steps you can take to reduce that impact. Tax-advantaged accounts are savings options to provide extra tax benefits in exchange for saving money. These may be tax-exempt (free from taxes), tax-deferred (you pay taxes later), or offer other types of tax benefits.

Tax-advantaged assets and accounts

Municipal bonds are issued by state and local governments and are generally free of federal income tax and may be free of state and local taxes for investors who reside in the areas in which they’re issued. Because municipal bonds tend to have lower yields than other bonds, the tax benefits tend to appeal to individuals with the highest tax burdens. Keep in mind that if you sell a municipal bond or other asset for more than you paid for it, you could face capital gains taxes.

For families facing future education costs, a Section 529 college savings plan (also known simply as a 529 plan) is worth investigating. It's a tax-advantaged account that can be used to pay for educational expenses. Some states even give their residents a state income tax deduction (Ohio, for example, permits a deduction for up to $4,000 per beneficiary per year).

There’s a myth that annual contributions to 529 plans are limited to only the gift tax annual exclusion amount (in 2023 the original $10,000 limit is indexed for inflation to $17,000). While gifts beyond this amount may use some lifetime gift tax exclusion, a contribution may be spread out over five years for gift tax purposes, and such plans allow for much higher contribution levels than the annual exclusion amounts (Ohio’s 529 plan limit, for example, is $523,000 in 2023). The primary tax benefit is that withdrawals are tax-free if used for qualified education expenses, but there are also estate/gift tax and asset protection benefits^‡.

Health savings accounts

A health savings account (HSA) allows you to set aside funds for medical expenses. The contributions reduce your taxable income, and qualified withdrawals are tax-free. However, to be eligible to contribute to an HSA, you must be enrolled in a high-deductible health plan.

Retirement account considerations

High-net-worth individuals should maximize the use of tax-advantaged retirement accounts, such as IRAs and 401(k) plans (including Roth IRA and Roth account variants). These accounts offer tax-deferred or tax-free growth, depending on the account type.

Annuities, often misunderstood, may be a great fit for some. A fixed annuity is a retirement vehicle that accumulates interest at a competitive rate, and interest usually is not taxable until it’s withdrawn. Annuity withdrawals made before age 59½ may be subject to a 10% federal income tax penalty.

Charitable giving strategies

Contributions to a 501(c)(3) charity may reduce income, capital gains and estate taxes. Donor-advised funds and private foundations are specific options to consider. Regardless, you must itemize your taxes to claim a tax-deductible donation and certain guidelines must be met for the donation(s) to qualify. The amount of charitable donations you can deduct may range from 20% to 60% of your adjusted gross income. Increasing your giving is good for others and your bottom line.

Since 2018, tax law changes dramatically reduced the number of taxpayers who typically itemized deductions. ‘Bunching’ is a strategy that allows for combining multiple donations into one year, as opposed to spreading it out evenly over multiple years. Gifting $40,000 in one year rather than $20,000 in each of two years, for example, may yield a much higher net income tax deduction over those two years.

Tax-loss harvesting

Tax-loss harvesting, also called tax-loss selling, is designed to preserve the value of an investor’s portfolio while reducing taxes. This is achieved by selling securities at a loss in order to offset capital gains taxes owed from selling profitable assets. This can reduce short-term capital gains, which are usually taxed at a higher rate than long-term capital gains.

Care should be taken not to buy the same security within 30 days of selling the security for a loss to avoid the ‘wash sale’ rule that may deny the ability to deduct the loss. A taxpayer is permitted to write off up to $3,000 in net losses each year against ordinary income if there are insufficient capital gains against which to deduct it.

Tax-efficient withdrawal strategies

Choosing when and which accounts to draw from could result in paying fewer taxes–or more if you do nothing. These decisions can be complicated, thus a good topic to discuss with an advisor. The ‘when’ is especially important.

Proportional withdrawals, a ‘spreading-out’ strategy, may also help. If you don’t have large capital gains, taking assets from various accounts each year, in proportion to your overall retirement portfolio, could reduce taxes.

Asset allocation and diversification

The options listed above to reduce one’s tax liability support a broad investment strategy and can be fruitful, especially if used in combination. Asset allocation and diversification, typically focusing on what, where, and the balance and risk of investments, applies here too, but more generally.

These different types of accounts and investments each offer specific benefits while giving you more control over your assets. When coupled with a tax-efficient withdrawal strategy, tax diversification may help your assets last longer in retirement.

We can help

Taxes can be high, regulations can be complicated, but fortunately there are many tax-reducing tactics available for HNWI to consider. To learn more, please contact your Huntington Private Bank team to see how we can help or find a Huntington Private Bank Office near you.