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Tax-Management Strategies for High-Net-Worth Individuals

Tax-Management Strategies for High-Net-Worth Individuals

February 02, 2022
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With the new year comes tax planning! For most people this is the time when they sigh and roll their eyes, but at Colorado West Investments, this is our favorite time of the year. While the thought of filing taxes can be anxiety-inducing, it really doesn’t have to be. There are dozens of ways to manage your tax bill—particularly for high-net-worth individuals.  Below we have outlined our most helpful tax-reduction strategies so you can feel confident and prepared this tax season.

1.   Contribute to a Health Savings Account

Health savings accounts (HSA) offer triple tax savings. You can contribute pre-tax dollars, pay no taxes on earnings, and withdraw the money tax-free to pay for medical expenses. Unused funds roll over each year and can be withdrawn without penalty for non-medical expenses at age 65, essentially becoming an IRA. You must be enrolled in a high-deductible health plan in order to qualify for an HSA, but this is usually not an issue for high-net-worth families.

HSAs can be a great tax-management tool if you are able to pay medical expenses out of pocket and leave the HSA funds to earn tax-free growth. The 2021 IRS contribution limits for HSAs are $3,600 for individuals and $7,200 for families. [1] If you are 55 or older, you may also be able to make catch-up contributions of $1,000 per year. [2] You have until April 15th for your contributions to count for the previous year’s tax return, meaning this strategy can still be effective for the 2021 tax year.

2.   Contribute to a Traditional IRA

Contributing to a traditional IRA is another way to reduce your AGI if your income is within certain limits. [3] By contributing pre-tax funds, you can effectively reduce your current year tax liability, but you will owe tax on both the contributions and the account growth when you withdraw the funds in retirement. The 2021 contribution limit for traditional IRAs is $6,000 with additional $1,000 catch-up contributions for individuals over the age of 50. [4] Like HSAs, contributions can be made until April 15th for the 2021 tax year.

3.   Give to Charity

If you are interested in giving charitably, while also reducing your tax bill, click here to read our other article about charitable giving. 

Annual gifts to qualified charitable organizations may be deemed an eligible itemized deduction and can be a very useful tax-minimization strategy. With the higher standard deduction, you’ll need to make sure your total itemized deductions for the year exceed $12,550 for an individual filer and $25,100 for married filing jointly. If your deductions fall below this amount, consider bunching your giving or doing several years’ worth of giving in one year.

Donor-advised funds are another option that allow you to contribute a lump sum all at once and then distribute those funds to various charities over several years. With this strategy, you can itemize deductions when you make the initial contribution and then take the standard deduction in the following years, allowing you to make the most out of your donation taxwise.

4.   Qualified Charitable Distributions

If you own a qualified retirement account, you can use a qualified charitable distribution (QCD) to receive a tax benefit for your charitable giving, and since this is an above-the-line deduction, it can be used in conjunction with other charitable tax strategies. A QCD is a distribution made from your retirement account directly to your charity of choice. It can count toward your required minimum distribution (RMD) for the year, but it won’t count toward your taxable income.

5.   Defer Income Tax Through Qualified Retirement Plans

Like traditional IRAs, qualified retirement plans also offer deferred income tax benefits. Many employers offer qualified retirement plans like 401(k)s, 403(b)s, and 457s, which allow you to contribute up to $20,500 annually in 2022 ($27,000 if over age 50). [5] These contributions are automatically deducted from your paycheck, meaning they won’t show up as part of your annual income. Also like traditional IRAs, you will owe tax on both the contributions and the account growth when funds are withdrawn in retirement. By maximizing contributions, taxes can be effectively deferred until your retirement years when you could potentially be in a lower tax bracket. 

6.   Consider a Roth Conversion

Roth IRAs are an attractive savings vehicle for many reasons, including no required minimum distributions (RMDs), tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. Unfortunately, Roth IRAs have income restrictions and you may not be able to open an account outright if you are above certain limits. [6] Instead, you can pay the taxes to convert a traditional IRA to a Roth. This enables you to reap the tax benefits, allowing your money to grow as long as you’d like.

7.   Utilize Tax-Loss Harvesting

Tax-loss harvesting involves selling investments at a loss in order to offset the gains in your portfolio. By realizing a capital loss, you are able to counterbalance the taxes owed on capital gains. The investments that are sold are usually replaced with similar securities in order to maintain the desired asset allocation and expected return. This can be a great way to make the most out of a losing situation by using an investment loss to offset your tax liability.

Start Tax Planning Today

If you are looking to the upcoming tax season with anxiety and dread, we are here for you. We at Colorado West Investments know how stressful taxes can be, but we also know just how much potential there is to save and redirect those costs back into your pocket. To learn more about our tax-managing strategies, call 970-249-9882 or email michael@wealthwithapurpose.com to get started.

About Michael

Michael Murphy is an associate wealth advisor at Colorado West Investments Inc., a wealth management firm committed to providing exceptional, comprehensive financial services to high-net-worth individuals, business owners, and retirees. Michael is known for building strong relationships with his clients, helping them clarify their goals and values, and partnering with them to design a financial road map that will help them work toward their ideal life. He is passionate about walking his clients through the financial planning process and seeing the confidence and relief on his clients’ faces as a result. Michael has a bachelor’s degree in finance from the University of Northern Colorado and an MBA from the University of Colorado Denver. When he’s not in the office, you can find him outside, likely hiking or mountain biking, or digging into a book. Michael and his wife, Becca, have 6 dogs at home. Becca runs a dog training and boarding facility. To learn more about Michael, connect with him on LinkedIn. 

*Advisors associated with Colorado West Investments, Inc. may be either (1) registered representatives with, and securities offered through LPL Financial, Member FINRA/SIPC, and investment advisor representatives of Colorado West Investments, Inc. or (2) solely investment advisor representatives of Colorado West Investments Inc., and not affiliated with LPL Financial. Investment advice offered through Colorado West Investments Inc., a registered investment advisor and separate entity from LPL Financial.

This information is not intended to be a substitute for specific individualized tax. We suggest that you discuss your specific situation with a qualified tax professional

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[1] https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-2022-hsa-contribution-limits.aspx

[2] https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-2022-hsa-contribution-limits.aspx

[3] https://www.investopedia.com/articles/retirement/03/011603.asp

[4] https://www.investopedia.com/articles/retirement/03/011603.asp

[5] https://www.investopedia.com/retirement/401k-contribution-limits/

[6] https://www.kiplinger.com/retirement/retirement-plans/roth-iras/603954/roth-ira-contribution-limits-for-2022