Tax Planning for High-Net Worth Investors: A 4-Part Series

What Are the Levels of Investors?

While most of us will have a reaction when the word “taxes” is spoken, do you know what the phrase “tax planning” means? It’s different from other terms surrounding payments to the IRS, including tax preparation. Tax planning can be a key strategy for high-income investors. 

Why Does it Matter for Tax Planning?

To truly understand the term (and what it could do for you), it’s worth breaking the topic into several components. Let’s look at the definitions for income and wealth, and the differences between tax planning and tax preparation for the different levels. In doing so, we’ll see how tax planning can take on different forms based on an investor’s circumstance.

Definitions of Wealth

In investing, there are typically four categories that are used to identify the level of wealth one holds.      

  • Mass affluent: an individual or household with an annual income of more than $75,000. The earner (or earners) will also have between $100,000 and $1 million invested in assets. 
  • Accredited investor: a person who may invest in securities that are not registered with the Securities and Exchange Commission (SEC), meaning they can purchase shares not sold in public markets. 

The individual will need to have an income of at least $200,000 in the last two consecutive years. (A joint income with a spouse of more than $300,000 works too.) They should also have a likelihood that the level of income will be achieved once more in the coming year. Or the person could have a net worth of more than $1 million (a joint net worth exceeding $1 million works, too). This figure excludes the value of their primary residence. 

  • Qualified investor: someone with a net worth of $2.1 million or more, either individually or jointly with their spouse. This amount excludes the value of their primary residence. The term also applies to individuals who have at least $1 million in assets under management with their advisor.
  • Qualified purchaser: an individual who owns a portfolio valued at $5 million or more. In addition, this term applies to a person who functions on behalf of other qualified purchasers with the capability of investing at least $25 million. These individuals may invest like institutions, meaning they have access to products not available to lower levels of investors.

It’s not uncommon for investors to be unaware of these terms. Interestingly, however, they have been around for some time. The concept of accredited investors dates to the Great Depression. It came into existence in the Securities Act of 1933. The government established it as sort of a bar. It allows individuals who passed the set threshold to have access to what we deem to be more sophisticated or complex investments. 

In 1982, the accredited investor standard was adopted and remains true today. At the time of its establishment, a mere 1.87% of the population fit the criteria for accredited investors. Today, because of inflation, that figure is closer to      10%, and there are discussions about raising the standard to better meet current trends. 

For this series, we’ll focus on tax planning for these types of investors:

  • Accredited investors
  • Qualified investors
  • Qualified purchasers

Tax Preparation vs. Tax Planning

Keep in mind that levels of income are taxed at different tax levels. Tax preparation involves putting the right numbers in place at tax time. 

Tax planning looks ahead to see if strategies can be put into place to change how those numbers will align. If you fall into the category of an accredited investor, qualified investor or qualified purchaser, you could benefit from tax planning. 

If your tax advisor isn’t bringing you in during the third or fourth quarter and charging you a separate fee to see the potential options available for your level of wealth, you might not be getting the tax planning strategies that could benefit you. In such a case, it could be time to call in an additional tax team member.

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Matthew Chancey is a Registered Representative of Coastal Equities, Inc. and an Investment Advisory Representative of Coastal Investment Advisors, Inc. Neither Coastal Equities, Inc. nor Coastal Investment Advisors, Inc. is affiliated with Micel Financial LLC. Investment Advisory Services are offered through Coastal Investment Advisors, Inc., and securities are offered through Coastal Equities, Inc., Member FINRA/SIPC, 1201 N. Orange St., Suite 729, Wilmington, DE 19801.

Coastal and CoastalOne are trade names for the Coastal Companies. The Coastal Companies are Coastal Equities, Inc., Coastal Investment Advisors, Inc., a US SEC Registered Investment Adviser and Coastal Insurance Services which is made up of several affiliated insurance agencies, co-located at 1201 N. Orange Street, Suite 729, Wilmington DE 19801