The past year has been one of complex challenges and unprecedented change. While many factors impact investors, research consistently shows that investors, particularly the high-net-worth are keenly aware of the negative effect taxes can have on their investments. According to the 2016 U.S. Trust Insights on Wealth and Worth survey, the majority (55%) of high-net-worth investors say it’s more important to minimize the impact of taxes when making investment decisions, while less than half (45%) say it’s more important to pursue the highest possible returns regardless of the tax consequences.
This should come as no surprise, since taxes can be one of the biggest investment expenses that affluent clients face. For high-net-worth and high earners, tax rates can be as much as 40% or even 50%, when Federal and state taxes are combined. In turn, these clients seek experienced advisors with proficiency in tax planning as part of a personalized and holistic approach to financial advice. For RIAs and fee-based advisors, developing expertise in tax planning—and putting it to work to protect clients' wealth—should be a top priority, not only during tax season, but all year long.
You should take measures to help your high-net-worth clients reduce the taxes owed on income and investment gains. A number of effective tax-planning strategies are outlined below.
Tax-Loss Harvesting
Taxpayers in higher brackets can harvest losses to offset investment gains and lower their tax liability. Focus on selling losing investments that no longer fit your high-net-worth client’s investing strategy, or use this as an opportunity to rebalance their portfolio. Typically you cannot sell shares to lock in a loss with the intention of buying them back right away. The IRS “wash sale” rule bars investors from claiming the loss if they buy the same or a “substantially identical” investment within 30 days of the sale. However, it’s a little-known fact that by moving these assets into certain tax-deferred vehicles, your clients can avoid wash sale rules and still remain invested in the same asset classes—allowing them to participate in future upside potential, while cutting their tax bill to maximize future growth. Even over a short time horizon, the benefit can be meaningful for many tax-inefficient assets and tactical strategies.
Annual Gift Tax Exemption
For the 2016 tax year, an individual client can give a gift of up to $14,000 per year—and couples can give a gift of up to $28,000 per year—to an unlimited number of recipients. These gifts can help reduce the amount of their taxable estate—and are exempt from the federal gift taxes. Gifts may include cash, stocks, bonds and portions of real estate. To contribute money toward a child’s education, clients typically can make a payment directly to an educational institution and pay no gift tax. To fund education expenses clients may also consider a tax-deferred 529 plan.