7 Effective Tax Optimization Strategies for High-Net-Worth Individuals

Mick Shonsey | Jan 23, 2025

1. Maximize Contributions to Tax-Advantaged Retirement Accounts

Retirement accounts play a foundational role in any effective tax strategy. Fully utilizing tax-advantaged accounts, like 401(k)s and IRAs, can reduce taxable income today while growing savings for the future.

For 2025, the contribution limits are:

401(k) contribution is $23,500 for individuals under 50, with an additional $7,500 catch-up contribution for those 50 and older.¹
IRA contribution is $7,000, the same as in 2024.¹

HNWIs may also consider:

Backdoor Roth IRA contributions for tax-free growth, especially if income limits prevent direct contributions.²
Employer-sponsored plans such as profit-sharing contributions to maximize retirement savings potential.

2. Use Charitable Giving to Offset Taxes

Charitable contributions may provide meaningful tax benefits while supporting causes that matter to you.

Strategies include:

Qualified Charitable Distributions (QCDs): HNWIs who are 70½ or older can donate up to $100,000 annually from an IRA to a qualified charity, potentially lowering taxable income.³
Donor-Advised Funds: Maximize your giving impact by contributing assets to a donor-advised fund (DAF) which offers an immediate tax deduction.⁴
Charitable Remainder Trusts: These trusts can support charitable giving, provide predictable income, defer income taxes on asset sales, and offer a partial charitable deduction.⁵

3. Prioritize Tax-Efficient Investment Strategies

Tax-efficient investments can help HNWIs minimize liabilities while maintaining portfolio growth. Consider options like:

Index Mutual Funds & ETFs: Depending on how they’re managed, these funds can incur fewer taxable events compared to other funds.⁶
Bonds: They can be tax-exempt, offer tax credits, or be direct-pay bonds, making them attractive options for tax-efficient investments.⁷
Tax-Loss Harvesting: By strategically selling assets at a loss, it is possible to offset capital gains and lower tax obligations.⁸

4. Optimize Business Structures

For high-net-worth business owners, the structure of your enterprise can have a significant impact on your tax obligations.

Examples include:

Pass-Through Entities: Sole proprietorships, limited liability corporations (LLCs), S-corporations, and other structures can let income "pass-through" the entity to personal income, preventing corporate taxes and double taxation (meaning taxes imposed once on the business and another time on personal income).⁹
C Corporation Advantages: With the corporate tax rate at 21%, converting to a C corporation could provide tax-saving opportunities, eliminating certain burdens that could subject HNWIs to higher tax rates.¹⁰

5. Explore Real Estate Investments

Real estate investments can offer deductions for expenses such as property taxes, mortgage interest, and depreciation.

Key strategies include:

1031 Exchanges: These can postpone capital gains taxes on properties if the proceeds are reinvested into similar real estate that meets the standards for a “like-kind exchange.”¹¹
Opportunity Zones: Investing in Qualified Opportunity Zones isn’t just a way to support economic development. It can also defer capital gains taxes.¹²

6. Advanced Tax Planning Strategies

For those looking to take tax mitigation a step further, advanced strategies include:

Qualified Opportunity Funds (QOFs): By reinvesting eligible gains in a QOF, you can defer taxes and potentially eliminate gains on the QOF investment, as long as you hold onto this investment for at least 10 years.¹³
Health Savings Accounts (HSAs): For HNWIs with high-deductible health plans, HSAs can provide multiple tax benefits, including tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified expenses.¹⁴
Roth IRA Conversions: Paying taxes now on a Roth IRA conversion can help avoid higher taxes later.¹⁵

7. Plan Ahead for Estate Taxes

Estate taxes can significantly erode wealth transfers, especially in the absence of an estate plan. In fact, those who fail to engage in estate tax planning could open up their heirs and estates to tax rates as high as 40%.¹⁶

Consider instead:

Annual Gift Tax Exclusions: In 2025, individuals can give up to $19,000 per recipient annually without incurring gift tax. That’s up $1,000 from last year, and it’s a viable option for the tax-free transfer of wealth, possibly reducing future estate tax obligations.¹⁷
Irrevocable Trusts: These estate planning devices can remove assets from a taxable estate, reducing the overall value of the estate and, possibly, future estate tax liabilities. Irrevocable trusts can also provide a tax-free way to transfer assets to beneficiaries.¹⁸
Family Limited Partnerships (FLPs): These structures can “pool” assets among multiple owners, removing those assets from each individual’s taxable estate.¹⁹

What’s Next? Tailor Your Tax Strategy Today

These strategies are just the beginning. Effective tax optimization requires a tailored approach based on your unique situation.

By working with a financial professional, you can align tax strategies with long-term financial goals. An advisor’s expertise can be invaluable for navigating complex tax laws, implementing advanced techniques, and securing your financial legacy.

Shonsey Wealth Management does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact us if you wish to have formal written advice on this matter.
Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney. Converting an employer plan account or Traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including but not limited to, a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.

Sources

1 - IRS, 2024 [URL: https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000]

2 - Investment News, 2024 [URL: https://www.investmentnews.com/rias/everything-you-need-to-know-about-backdoor-roth-iras/248324]

3 - IRS, 2023 [URL: https://www.irs.gov/newsroom/qualified-charitable-distributions-allow-eligible-ira-owners-up-to-100000-in-tax-free-gifts-to-charity]

4 - San Diego Foundation, 2024 [URL: https://www.sdfoundation.org/news-events/sdf-news/what-to-know-about-donor-advised-funds-in-2024-rules-tax-deductions-comparisons-and-more/]

5 - IRS, 2024 [URL: https://www.irs.gov/charities-non-profits/charitable-remainder-trusts]

6 - FINRA, 2025 [URL: https://www.finra.org/investors/insights/etf-vs-mutual-fund]

7 - IRS, 2024 [URL: https://www.irs.gov/tax-exempt-bonds]

8 - Investopedia, 2024 [URL: https://www.investopedia.com/terms/t/taxgainlossharvesting.asp]

9 - Tax Policy Center, 2024 [URL: https://taxpolicycenter.org/briefing-book/what-are-pass-through-businesses]

10 - Thomas Reuters, 2024 [URL: https://tax.thomsonreuters.com/blog/how-are-c-corporations-taxed-tips-on-how-to-avoid-double-taxation-and-reduce-taxes/]

11 - IRS, 2024 [URL: https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips]