Tax-efficient wealth strategies can help you align your financial goals with smart structures and investment vehicles that legally minimize your tax burden.
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For high-income earners and ultra-high-net-worth individuals, one of the most pressing concerns isn’t just how to grow wealth. There are also questions regarding ways to keep it. As income rises, so does the complexity of the tax landscape.
Tax-efficient wealth strategies can help you align your financial goals with smart structures and investment vehicles that legally minimize your tax burden. In this article, we’ll take a high-level look at three powerful strategies: private equity investments, municipal bonds, and Opportunity Zones. Each offers unique advantages for those looking to preserve capital and grow wealth over the long term.
1. Private Equity: Deferred Taxes and Long-Term Gains
Unlike public market investments, private equity deals often delay taxation until a liquidity event occurs. This could take the form of a sale or IPO. The deferral of capital gains allows more of your money to stay invested longer.
In addition, many private equity structures qualify for long-term capital gains treatment, which is taxed at lower rates than ordinary income. As an investor, you could also benefit from depreciation and amortization, which reduce taxable income while still allowing your investment to grow.
2. Municipal Bonds: Tax-Free Income with Low Volatility
If you’re in a high tax bracket, you may be attracted to the tax-exempt benefits of municipal bonds. These are issued by state and local governments, and they collect interest that is free from federal taxes. They may also be exempt from state and local taxes if you live in the issuing state.
You might choose municipal bonds as a way to bring balance to your portfolio. In a shifting market, they could provide some diversity if you also hold stocks. Bonds generally provide steady returns, which could make them a smart choice for preserving capital. If you are a high-net-worth individual and are nearing retirement or seeking steady income with minimal tax exposure, you might consider municipal bonds.
3. Opportunity Zones: Turning Capital Gains Into Long-Term Tax Savings
Introduced as part of the 2017 Tax Cuts and Jobs Act, Opportunity Zones refer to a tax incentive program. They are designed to generate investment in economically distressed areas. If you are thinking about investing in Opportunity Zones, it can be helpful to be aware of the benefits they offer:
- Deferral of current capital gains: This can happen when gains are reinvested into a Qualified Opportunity Fund (QOF).
- Reduction of the tax owed: You could achieve tax savings on gains if the investment is held for a designated period.
- Exclusion of new gains: This can occur if you hold the Opportunity Zone investment for at least 10 years.
Plan the Right Way for Tax-Efficient Wealth
By using a combination of investments and structures, high-income individuals can find ways to protect their wealth for their families and beyond. If you’re an accredited investor, you might decide to use private equity and municipal bonds, or to invest in Opportunity Zones to reduce your tax liability. You’ll need to work closely with a tax professional who is aware of your financial goals and can present options to you so you’re able to make decisions that are best for your situation.
