Tax Day Is Coming, Are You Prepared?

With Tax Day fast approaching, now is the time to prepare. For high-net-worth individuals nearing retirement, strategic tax planning is key to preserving wealth, reducing tax liabilities, and ensuring long-term financial security.

At NJM Wealth Preservation Strategies, we’re experienced in helping individuals navigate the complexities of tax planning, optimize their wealth, and help ensure that their strategies align with their long-term retirement goals.

In this blog, we’ll explore general tax planning strategies for the current tax year, provide key information on important changes, and offer tips for preparing your taxes effectively as you approach your golden years.

1. Understanding Tax Implications

Wealthy individuals face unique tax challenges, especially when it comes to managing taxable income, capital gains, estate taxes, and more. Understanding the latest updates for the current tax year can help you make informed decisions.

Income Tax

For high-net-worth individuals, income tax can represent a substantial portion of earnings. In 2024, the federal income tax rates remain progressive, ranging from 10% to 37% based on income levels. The tax brackets are as follows:

  • 10% for taxable income up to $11,600 ($23,200 for married couples filing jointly)
  • 12% for income over $11,601 ($23,201 for married couples)
  • 22% for income over $47,151 ($94,301 for married couples)
  • 24% for income over $100,526 ($201,051 for married couples)
  • 32% for income over $191,951 ($383,901 for married couples)
  • 35% for income over $243,726 ($487,451 for married couples)
  • 37% for income over $609,351 ($731,201 for married couples)

High-income earners must manage their tax strategy to reduce taxable income, especially in higher tax brackets. For many, this involves planning for the timing of income recognition and exploring various tax-efficient options.

Capital Gains Tax

Capital gains tax applies to selling assets like stocks, bonds, and real estate. Long-term capital gains (for assets held for over a year) are taxed at a lower rate than ordinary income.

A capital gains rate of 0% applies if your taxable income is less than or equal to:

  • $47,025 for single and married filing separately;
  • $94,050 for married filing jointly and qualifying surviving spouse; and
  • $63,000 for head of household.

A capital gains rate of 15% applies if your taxable income is:

  • more than $47,025 but less than or equal to $518,900 for a single;
  • more than $47,025 but less than or equal to $291,850 for married filing separately;
  • more than $94,050 but less than or equal to $583,750 for married filing jointly and qualifying surviving spouse; and
  • more than $63,000 but less than or equal to $551,350 for head of household.

However, a capital gains rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.

There are a few other exceptions where capital gains may be taxed at rates greater than 20%:

  • The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
  • Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
  • The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

For high-net-worth individuals, managing capital gains and using strategies like tax-loss harvesting can help offset taxable gains and reduce liability.

Estate and Gift Taxes

The federal estate tax exemption for 2024 is $13.6 million per individual. This means estates valued below these thresholds are not subject to estate tax. However, any estate above this amount could be subject to federal estate tax, which can be as high as 40%.

Additionally, the federal gift tax exemption for 2024 allows individuals to give up to $18,000 per recipient annually without triggering gift tax. For gifts above this amount, you’ll need to file a gift tax return, but most individuals will not owe tax because the gifts count toward the lifetime exemption.

2. Tax Planning Strategies 

Effective tax planning involves being proactive and seeking ways to reduce your overall tax burden. Below are some strategies to consider:

Maximize Retirement Contributions

Contributing to tax-deferred retirement accounts like 401(k)s, IRAs and other tax-advantaged accounts is one of the most effective ways to help reduce taxable income. For individuals over 50, the contribution limits increase, allowing you to save more for retirement and lower your taxable income.

For 2024, the contribution limits are as follows:

  • 401(k): Up to $23,000, or $30,500 if you’re 50 or older
  • Traditional and Roth IRAs: Up to $6,500, or $7,500 if you’re 50 or older

These contributions lower your taxable income for the year, which can help reduce the taxes you owe.

Explore Tax-Efficient Investment Strategies

Tax-efficient investment strategies are essential for high-net-worth individuals who want to maximize their returns and minimize their tax liabilities. Working with a financial advisor or tax professional can help you identify strategies to reduce taxes on investments, including:

  • Municipal Bonds: Interest income from municipal bonds is generally exempt from federal income taxes and, in some cases, state taxes.
  • Tax-Deferred Accounts: Contributions to accounts like 401(k)s and IRAs grow tax-deferred, meaning you won’t owe taxes on the earnings until you withdraw them in retirement.
  • Tax-Loss Harvesting: Selling investments at a loss to offset gains in other areas of your portfolio can help reduce your taxable income.

Consider Charitable Giving

Charitable donations can reduce your taxable income while supporting causes you care about. Contributions to qualified charitable organizations may be deductible, potentially lowering your taxable income.

You can also explore more strategic options for charitable giving, such as Donor-Advised Funds (DAFs). DAFs allow you to save money for future charitable donations while receiving immediate tax benefits. This can be an excellent tool for high-net-worth individuals looking to make a lasting impact.

3. Estate Planning and Trusts

Estate planning is an important part of tax preparation for wealthy individuals. The goal is to minimize estate taxes, help ensure wealth is passed on efficiently to heirs, and protect assets.

Irrevocable Trusts

Placing assets in an irrevocable trust can remove those assets from your taxable estate, potentially reducing estate tax liability. This strategy is often used to help protect wealth for future generations while providing flexibility for asset management.

Grantor Retained Annuity Trusts (GRATs)

A GRAT allows you to transfer assets to heirs while retaining an income stream for yourself. This strategy can be particularly effective for transferring appreciating assets while helping minimize estate tax exposure.

Family Limited Partnerships (FLPs)

FLPs allow families to pool assets and divide ownership shares, providing estate and gift tax reduction opportunities. This structure is often used for business interests or real estate holdings.

4. Stay Updated on Tax Law Changes

As we approach Tax Day, it’s important to be aware of potential changes in tax laws. While the tax code remains relatively stable, ongoing political developments and economic shifts may result in tax brackets, deductions, or credit adjustments.

How NJM Wealth Preservation Strategies Can Help

At NJM Wealth Preservation Strategies, we’re experienced in helping high-net-worth individuals navigate tax planning, wealth management, and retirement strategies. Our professionals work closely with clients to identify strategies that align with their unique financial situation and retirement goals.

Final Thoughts: Get Ready for Tax Day

With Tax Day fast approaching, now is the time to get your financial house in order. Proactive tax planning can significantly reduce tax liabilities and preserve wealth. Taking steps today—contributing to retirement accounts, exploring tax-efficient investment strategies, and reviewing your estate plan—can help ensure a smooth and efficient tax filing process.

At NJM Wealth Preservation Strategies, we’re here to guide you through the complexities of tax preparation and help you make informed decisions that support your financial success in retirement.

If you have questions or need assistance with your tax planning, don’t hesitate to contact us today. We’re committed to helping you preserve wealth for a secure and prosperous future.

Tax Planning FAQs

1. What’s the difference between tax-deferred and tax-free retirement accounts?

Tax-deferred accounts, like traditional IRAs and 401(k)s, allow you to contribute pre-tax dollars, potentially reducing your taxable income in the year you contribute. However, you’ll pay taxes when you withdraw funds in retirement. Tax-free accounts, such as Roth IRAs, involve contributions with after-tax dollars, but qualified withdrawals are tax-free. Deciding between the two depends on your current and expected future tax rates.

2. How can I minimize taxes on my Social Security benefits in retirement?

Social Security benefits can be taxable if your total income exceeds certain thresholds. In 2024, up to 85% of your benefits can be taxable if your income is above $44,000 for married couples ($34,000 for individuals). To help minimize taxes on your Social Security benefits, consider strategies like reducing your taxable income through tax-deferred retirement contributions or using tax-efficient investment strategies.

3. How do changes in tax laws affect my retirement planning?

Tax laws can change based on economic shifts, new government policies, or tax reforms. For high-net-worth individuals, changes to capital gains tax rates, estate tax exemptions, and deductions can significantly affect your retirement plan. Staying informed about potential changes and adjusting your strategy with the help of a financial advisor can help mitigate any negative impact on your retirement wealth.

4. Should I be concerned about state income taxes in retirement?

Yes, state income taxes can significantly impact your retirement income. Some states have no income tax, while others impose taxes on Social Security, pensions, and other retirement income. It's important to research the state's tax policies where you plan to retire and consider how state taxes will affect your overall retirement plan. Working with a financial professional can help you navigate these state-specific tax implications.

5. How can I reduce my tax burden on inherited assets?

When you inherit assets, the taxes you owe depend on the type of asset and its value. While the federal estate tax exemption has been raised, inheriting assets could still result in capital gains taxes when you sell. Strategies like using step-ups as a basis for inherited property or placing assets in trusts may be beneficial to reduce the tax burden. Consulting with an estate planner or tax advisor can be beneficial for structuring a strategy that helps minimize taxes on inherited wealth.

Disclaimer: NJM Wealth Preservation Strategies does not provide specific investment advice. The content here is intended for educational purposes only. We recommend consulting a tax advisor before making any financial decisions.