High net worth individuals – those with at least $1 million in liquid financial assets – have worked hard and invested wisely to create their net worth. But while a high income and investments can help you grow wealth, it never guarantees financial success. That’s due to the fact that even the wealthy make tax mistakes that cost both time and money.
If you are a high net worth individual looking to maximize your financial planning, here are some key mistakes to avoid.
It’s Still About Savings
Investing in the United States isn’t the only option available to the rich. Instead of investing in companies in a single country, you can diversify your portfolio around the world. However, if you aren’t skilled at investing overseas, you may have to pay thousands of dollars in tax bills for missed filings, as well as US income tax on your investments.
Another common HNW tax mistake is a failure to understand investing tax laws and strategies such as tax-loss harvesting. Tax-loss harvesting allows you to sell an underperforming investment, replace it with a reasonably similar investment and use the loss to reduce your taxable capital gains. The best way to maximize tax-loss harvesting is to incorporate it into your year-round planning and investing strategy.
Missing your IRA Required Minimum Distribution (RMD) can also be a costly tax mistake. The law requires a person to begin withdrawals from their 401(k), IRA, Simple IRA, and other retirement accounts when you reach the age of 72. But if you miss the deadline or do not withdraw enough you may owe a 50% excise tax on the amount not withdrawn.
Finally, high net worth individuals may miss large tax benefits if they fail to use charitable giving opportunities. You can donate anything from cash to cars to appreciated stock, and deduct those items at the year’s end. But there are two additional options that allow individuals to donate tax-free.
One option is a donor-assisted fund, or DAF. A DAF is an account or fund to which you can contribute, and then donate those funds to charities over time. Funds put into a DAF are not subject to estate taxes and can be deducted at the current market value instead of the original cost. For clients that have an RMD, the second option is to give up to $100,000 per year directly from an IRA. This is known as a qualified charitable distribution or QCD, which is considered a gift, and therefore is not subject to taxes. You must be at least 70.5 years of age to start a QCD.
If you are an affluent individual, entrepreneur or businessperson, there are many HNW tax mistakes that can cost you thousands. But you can avoid these mistakes by implementing smart income tax planning strategies that minimize your losses and protect your net worth over time.
The Jeffrey M. Verdon Law can help you reach your tax goals. For more than 30 years, Jeff has helped his clients by designing a custom strategy and comprehensive estate plan to protect their personal and business assets.