Top 10 Tax Planning Strategies for High-Income and High-Net-Worth Individuals

Reduce Your Taxable Income

There are several ways to save and spend money that reduce your taxable income, and those people committed to reducing their tax bill should take advantage of them. 

 1. Max Out Your Tax-Advantaged Retirement Accounts 

One way of reducing your taxable income is by investing in tax-deferred retirement accounts. These accounts[MS1]  include traditional IRAs and employer-sponsored retirement accounts such as 401(k)s or 403(b)s. The money you invest in a tax-deferred account is deducted from your taxable income; instead, you pay taxes when you withdraw money from the account in retirement. Each type of account has its a yearly contribution limit, and contributing the maximum amount allowed each year in every tax-advantaged account available to you can be an effective strategy for those looking to reduce their tax burden while saving for the future.

2. Contribute the Maximum to Your Health Savings Account

Those covered under a high-deductible health insurance plan have access to a type of investing account called a health savings account. Money contributed to a health savings account is tax deductible. Additionally, you do not need to pay income tax on the growth when withdrawing funds for qualified medical expenses. This combination of advantages makes health savings accounts a powerful tax-planning tool.

3. Save for Education in a 529 Plan

Many parents want to save for their children’s college expenses and using a state-sponsored 529 educational saving plan is an excellent way to start saving. Money contributed to this type of account usually benefits from tax advantages, such as being deductible from your state income taxes in some states. 529 accounts also typically offer tax-free growth and withdrawals when the funds are used for qualified educational expenses. The specific advantages of each plan differ by state. You are not limited to the 529 plan offered by the state where you live, so you can shop around to find the plan that will work best for your financial situation. 

4. Increase Your Charitable Giving

Charitable donations are often tax deductible, so increasing your giving is another effective way to lower your taxable income while giving back to the communities and causes close to your heart. You could also consider giving from a donor-advised fund to amp up the tax advantages even more.

Employ Tax-Efficient Investing Strategies

Some investments and investing strategies are more tax efficient than others, which is worth considering as you plan for your future. You should research every investment and learn how it compares to other investment options to ensure you make the best choices to help you achieve your goals.

5. Invest in Tax-Exempt Bonds

Municipal bonds are tax-exempt, meaning the interest they earn is not taxed at the federal level. Some states also exempt municipal bond earnings from state income taxes, so you could save on two fronts. Bonds, including municipal bonds, tend to provide lower returns in the long term than stocks, but bonds can contribute to your portfolio’s diversification, providing some stability when stock returns drop. 

6. Take Advantage of Opportunities for Tax-Loss Harvesting

When the value of an investment goes down, some investors adopt the strategy of tax-loss harvesting, which can be done automatically with investment software. The software sells the underperforming investment at a loss and immediately buys a similar investment to replace it. This allows the investor to claim a loss in income on their tax returns, lowering their capital gains and income taxes without affecting the overall balance of their portfolio. 

7. Consider Investing in Low-Turnover Index Funds and Exchange-Traded Funds

Investments in a taxable brokerage account are subject to capital gains taxes every time they are sold for profit, so frequently buying and selling individual stocks or investing in funds with a high turnover rate are not the most tax-efficient strategies. Instead, consider a buy-and-hold strategy with low turnover funds to limit your exposure to short-term capital gains taxes, which tend to be more expensive than long-term capital gains taxes.

File Your Taxes Correctly

Filing taxes correctly can take some know-how, especially if you are a business owner, have multiple income streams, or are in another complex financial situation. Making mistakes when filing your taxes often costs you, so it is a good idea to take the time to familiarize yourself with the tax code or work with a trusted professional who can guide you through the process. 

8. Know When to Itemize or Take the Standard Deduction

If your deductible expenses exceed the standard deduction in a given tax year, then itemizing each expense on your tax return will likely decrease your overall tax bill. However, if your expenditures do not exceed the standard deduction, you may benefit from taking the standard deduction and saving yourself some time. Depending on your overall financial plan, goals, and priorities, you may consider modifying your approach to increase deductible expenditures and lower your income tax bill in the future.

9. Claim All Relevant Tax Credits

Tax credits are reductions in your tax bill that generally encourage specific spending behaviors that benefit the economy or the environment. Credits typically save you more money than deductions because they directly decrease the dollar amount you owe in taxes instead of simply lowering your taxable income. Tax credits are available for all sorts of things, including family and dependent credits, clean vehicle and energy credits, and homeowner credits. Work with a tax professional or independently research to ensure you get every credit you qualify for. 

10. Pay the Taxes You Owe

You should generally avoid overpaying when you file your taxes, but never at the risk of failing to pay the taxes you rightfully owe. Trying to avoid taxes altogether or purposefully underpaying can have significant legal and financial consequences, including penalties and interest on unpaid amounts and even jail time in extreme cases

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