6 tax planning strategies for wealthy investors

6 tax strategies for wealthy clients

April 19, 2022 4:52 PM

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The Biden administration’s extensive plans to transform the tax landscape in the proposed Build Back Better legislation are currently on hold.

In the interim, top wealth managers are seizing the opportunity to propose and implement carefully considered tax planning strategies that will provide significant benefits for their affluent clients.

Here are six of the most popular.

How wealthy clients can turn a mortgage into a big tax deduction

While housing prices have skyrocketed across the country in the 12 months through last November — by as much as 25% in places like Florida, Idaho and Arizona — wealthy homebuyers are not experiencing lower tax bills due to IRS limits on mortgage interest deductions.

The current tax code caps deductions at $750,000 of all debt on a primary residence and vacation home, and at $1 million for homes bought on or before Dec. 15, 2017 (half that for married couples filing separately in both cases).

However, wealth managers to ultra-affluent clients are recommending a specific technique to maximize the tax savings that can be made when buying that Florida beach property or Colorado ski lodge.

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How wealthy clients can turn a mortgage into a big tax deduction

A field guide to taxes for affluent investors

From a tax-saving perspective for wealthy investors, how can you turn a Roth conversion to your advantage? And, why should you be investing in qualified small business stock?

While the country waits for the significant tax changes in the stalled Build Back Better tax-and-spending proposals to be put back in motion, affluent investors and their advisors are looking carefully at the Internal Revenue Code to uncover ways they can minimize their tax burdens.

Here are nine strategies investors can use.

Read more:

A field guide to taxes for affluent investors

How wealthy clients can cut their tax bills like a hedge fund

Clients have generally become more affluent during the pandemic. Thanks to booming stock prices and rapidly rising property values, the Fed reports an increase in Americans’ wealth of close to $36 trillion, or 31%, in the last two years.

But there is a drawback. “Capital gains are a good problem to have, but an embedded gain is essentially an embedded tax liability,” says Amanda Lott, head of wealth planning strategy at J. P. Morgan. “Tax efficiency is top of mind.”

As such, wealth managers are turning to an investment strategy for their individual affluent clients that is more commonly associated with hedge funds: short selling.

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How wealthy clients can cut their tax bills like a hedge fund

Wealthy tax return filer? Silver lining graces challenging IRS season

Tax season is typically fraught with anxiety for the 160 million-plus individuals who file federal returns each year. However, annual gifts with gift tax returns, that are generally filed by the affluent in much lower numbers, currently offer wealthy taxpayers a significant opportunity.

“We’re moving forward under traditional planning that works under current law and that we think will work” if the Build Back Better tax-and-spending proposals move forward, says Laura Zwicker, chair of the private client services group at Los Angeles law firm Greenberg Glusker.

As part of their strategic tax planning in the light of potential tax changes ahead, wealth managers are using annual gifts as an ideal way to transfer wealth out of an estate.

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Wealthy tax return filer? Silver lining graces challenging IRS season

‘Personal finance secret’: Donating stock is more lucrative than giving cash

Charitable giving has the potential to be a key element in an affluent client’s investment strategy, but many investors and wealth managers are not familiar enough with the rules and the fact that giving stock instead of cash to a charity is more beneficial to both parties.

“It’s a great personal finance secret,” said Steve Latham, the co-founder and chairman of donatestock.com, an online giving service. “There’s no reason to donate cash.”

The benefits for investors include not having to pay federal capital gains tax if the donated shares have been held for at least one year, and being able to write off on their federal returns the full fair market value of the shares, not just what they paid.

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‘Personal finance secret’: Donating stock is more lucrative than giving cash

SLAT is tax ‘acronym du jour’ for the married and wealthy: What you need to know

With the proposed tax-and-spending legislation of the Build Back Better plan currently on hold, grantor trusts that were due to be checked can now continue to form the basis of a popular new wealth management strategy for high net worth married couples.

A spousal lifetime access trust, or SLAT, allows couples to transfer assets out of their taxable estate while simultaneously reaping the benefits of those assets during retirement.

But while a SLAT seems like a ‘have your cake and eat it, too’ strategy, there are challenges that need to be avoided in order to gain the full tax rewards.

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SLAT is tax ‘acronym du jour’ for the married and wealthy: What you need to know