Key Points

• Tax planning is crucial for high-net-worth individuals who want to maximize wealth accumulation and mitigate the impact of taxes on investment returns.

• Taxes can significantly erode investment growth over time, making it essential to consider the role of taxes in financial planning.

• Strategies such as utilizing tax-efficient investment vehicles, strategic charitable giving, tax-loss harvesting, and estate planning can optimize after-tax investment returns and minimize tax liabilities.

Tax planning is a critical aspect of financial management that often goes overlooked. For high-net-worth individuals, understanding the implications of taxes on investment returns is paramount to maximizing wealth accumulation. Taxes can significantly impact the growth and preservation of investment portfolios, potentially eroding your hard-earned gains over time.

Let’s take a look at why tax planning is important, how it can impact your financial goals, and what to look out for to help you navigate these tricky waters.

How Taxes Can Impact Your Investments

When it comes to investing, many high-net-worth individuals focus solely on the gross return achieved without fully considering the impact of taxes on returns. Taxes can significantly impact investment growth and erode returns over time. Capital gains taxes and taxes on dividend and interest income eat away at your investment returns, leaving you with less wealth than anticipated. It's crucial to understand that taxes are an inevitable part of the investment landscape, and failing to account for them can hinder your financial progress.

Let’s look at an example.

Let's say you invest $100,000 in a stock that appreciates by 10% in a year. Without factoring in taxes, your investment would grow to $110,000. However, if you were to incur a federal capital gains tax rate of 20% upon selling the stock, your after-tax investment value would be reduced to $108,000. That's a $2,000 difference! Additionally, many states also tax capital gains as well.  Over the long term, these tax implications can compound, potentially leading to a significant reduction in your overall investment returns.

Given the potential drain on investment returns caused by taxes, proactive tax planning is crucial for high-net-worth individuals.

4 Ways to Benefit from Tax Planning

A proactive approach to tax planning allows you to optimize your after-tax investment returns.

Here are 4 strategies to consider:

Use Tax-Efficient Investment Vehicles Such as IRAs, 401(k)s, and HSAs:

Tax-efficient investment vehicles such as Individual Retirement Accounts (IRAs), 401(k)s, and Health Savings Accounts (HSAs) offer various tax advantages, such as tax-deferred or tax-free growth and potential deductions on contributions. By strategically allocating some of your investments to these vehicles, you can optimize your tax efficiency and enhance your long-term investment returns.

Maximize Taxes Through Charitable Giving

Charitable giving not only allows you to make a positive impact on causes you care about but can also offer tax benefits. By strategically planning your charitable contributions to increase your itemized deductions to be above the standard deduction, you can effectively reduce your overall tax liability. One example would be donating appreciated securities to a donor-advised fund. Another approach for individuals who are at least 70.5 years of age is to make qualified charitable distributions (QCD) directly from an IRA to a charity.  Donations made through a QCD reduce your taxable income and also count towards any required minimum distribution requirement you may have. You can find out more about the specifics of charitable giving in our article here.

Implement Tax-Loss Harvesting to Offset Capital Gains

During periods of market volatility, tax-loss harvesting can be a valuable strategy to mitigate the impact of capital gains taxes. By strategically selling investments that have declined in value, you can generate capital losses that can be used to offset capital gains realized elsewhere in your portfolio or to build up losses that can carry forward to future tax years and reduce future capital gain taxes. This technique not only reduces your tax liability but also provides an opportunity to rebalance your portfolio. In this technique, similar proxy securities are also simultaneously purchased so the portfolio remains positioned for future growth.

Utilize Estate Planning Techniques to Minimize Estate Taxes

Estate taxes can significantly impact the wealth you pass on to future generations. Techniques like establishing trusts or gifting strategies can help minimize your estate tax liability. By strategically structuring your estate, you can protect your assets, provide for your loved ones, and ensure a smooth transfer of wealth while optimizing your tax situation.

Gain a Competitive Edge with Capstone

Whether it's utilizing tax-efficient investment vehicles, managing capital gains, or implementing strategic charitable giving, a tax plan tailored to your financial goals can make a substantial difference in preserving and growing your wealth.

Your Capstone Advisor creates a strategic plan that incorporates financial planning and tax preparation. We take a look at your unique circumstances and help you navigate the complexities of tax regulations, minimize your tax burdens, and maximize your investment returns. Our personal approach is aimed at preserving and growing your wealth in the most tax-efficient manner possible, giving you a competitive edge in the ever-changing tax landscape.

Disclosures:

This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.