Year-End Tax Planning for High-Net-Worth Individuals

Historical insight — Originally published October 22, 2024. Preserved as historical content; information may have changed.

As the year’s end approaches, High-Net-Worth Individuals (HNWIs) must prepare for one of the most critical monetary tasks: year-end tax planning. Due to the nature of their holdings and dynamic financial situation, HNWIs often grapple with complex tax management issues. With astute planning, mitigating significant tax liability may be possible.

First, comprehensive tax planning involves critically reviewing current income and projected future earnings. Review helps ensure that you’re optimizing timing, deducting expenses, and other allowances in compliance with current tax laws.

Next, it’s important to review various tax-planning strategies that may help lower tax liabilities, provide tax breaks, and mitigate tax issues that may impact an estate plan:

• Harvesting Tax Losses –This strategy involves selling off investment properties that have lost value since their acquisition. The losses incurred can offset capital gains taxes. If the losses exceed the gains, they may offset other income.
• Roth IRA Conversions – Converting traditional IRA funds into a Roth IRA may be an appropriate strategy due to tax-free distributions later. However, the conversion triggers taxes due in the year of conversion, so this strategy may be appropriate during years of low income or before tax rates increase.
• Charitable Contributions – A common strategy to help lower taxes while doing good is making charitable contributions. Charitable contributions may provide significant tax deductions when donating cash if you itemize. Additionally, donating appreciated securities can help lower capital gains tax, but you must not liquidate the security but donate directly to the charity.
• Gift Tax Exemption Utilization – The IRS allows up to a specific amount of money to be gifted to heirs free of gift taxes each year. This tax strategy can help ease the future estate tax liability, especially if the estate’s value may appreciate over time.
• Taking Advantage of Retirement Account Contributions – By maximizing contributions to retirement accounts like 401(k)s or IRAs, HNWIs can mitigate their taxable income. Pre-tax contributions decrease the current year’s taxable income, providing immediate tax savings.
• Health Savings Account (HSA) Contributions – For those eligible for HSA, maximizing contributions can provide triple tax benefits – deductions on contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
• Trust Planning – Complex tax-planning strategies using trusts may provide income tax benefits, especially in low-interest-rate environments. HNWIs must work with estate planning, legal, financial, and tax professionals to explore various trust planning options.
• Reviewing Withholding and Estimated tax payments – Ensuring that sufficient taxes have been paid throughout the year can help avoid underpayment and mitigate the need for lump-sum tax payments.

Tax planning is not a one-size-fits-all solution. It is a strategic process that requires an intricate understanding of the financial situation, personal goals, risk tolerance, and, most importantly, the dynamic tax laws. With an appropriate strategy and assistance from financial and tax professionals, HNWIs may seek efficient tax benefits while staying compliant with today’s tax laws.

This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Traditional I RA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

Contributions to a traditional I RA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% I RS penalty tax in addition to current income tax.

The tax-loss harvesting and other tax strategies discussed should not be interpreted as tax advice and there is no representation that such strategies will result in any particular tax consequence. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

This article was prepared by Fresh Finance

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