As your income grows, so does your tax bill—and often disproportionately. If you’re a high-income earner, you already know the sting of paying top-bracket rates on both earned and investment income. But here’s the good news: you don’t have to let taxes erode your wealth. By using tax-efficient investment strategies, you can reduce your tax exposure while building long-term, sustainable wealth.
In today’s environment, it’s not about finding tax shelters or using tools designed for lower income earners. Instead, there could be tax mitigation options available through alternative investment strategies. You’ll want to work with a tax professional who is aware of these capital gains tax deferral strategies and tax-advantaged wealth transfer techniques.
In the following sections, I’ll explain some of the tax-efficient investment approaches available to high-net-worth investors. I’ll cover private equity, real estate partnerships, and structured investments that can legally reduce taxable income. Once you’re informed of these, you’ll be able to consider if they fit into your current investment strategies.
Tax-Efficient Investments Through Private Equity
When you invest through a private equity fund or limited partnership, you often benefit from long-term capital gains treatment instead of ordinary income. Better still, the income is often deferred until there’s a liquidity event. That means you’re not paying taxes on gains until the asset is sold—offering you a built-in capital gains tax deferral strategy. Many high-net-worth investors also benefit from depreciation and amortization write-offs that come with private deals.
Real Estate Partnerships and Opportunity Zones
When you participate in a real estate partnership, you can often use depreciation to reduce your taxable income, even if the property itself is increasing in value. If you qualify as a real estate professional or invest through certain structures, these benefits can be even greater.
If you’re holding significant unrealized gains in stocks, real estate, or a recent business sale, consider investing those gains into an Opportunity Zone Fund. These government-designated zones offer:
- Tax deferral on your initial capital gains.
- Potential reduction in the tax owed if held for a determined time that is long enough.
- Full exemption from taxes on any new gains earned through the fund if held for at least 10 years.
This tax-efficient investment can provide a number of additional advantages. Besides saving an initial sum of money, you could achieve long-term growth that helps you further build and protect your wealth.
Structured Investments with Built-In Tax Advantages
As a high-net-worth investor, you may have access to structured notes—customized debt securities linked to market indices or assets. These aren’t for everyone, but when used correctly, they can help you manage downside risk and defer taxable gains.
While many structured investments generate interest that’s taxed as ordinary income, certain configurations can allow you to defer recognition or qualify for long-term capital gains treatment. If you’re not working with an advisor who understands how to build these into a tax-aware strategy, it may be time to revisit your approach.
Another tool to consider is Private Placement Life Insurance (PPLI). It’s not your typical insurance product. PPLI lets you hold alternative investments inside a life insurance wrapper, allowing your capital to grow tax-free and be accessed through loans or withdrawals. It could also provide additional tax efficiencies if it is structured correctly.
Municipal Bonds Come with Tax Savings Potential
You may have heard about municipal bonds for investors. They’re sometimes viewed as conservative, but if you’re in a high tax bracket, they can deliver more value than you might expect.
Interest from munis is generally federal tax-free, and it could be exempt from state and local taxes if you live in the issuing state. That means the after-tax yield of a municipal bond can be higher than a taxable bond with a greater nominal rate. For example, if you’re in the 37% bracket, a 3.5% yield from a muni may be equivalent to a 5.5% taxable bond yield.
Tax-Advantaged Wealth Transfer Techniques
If you want to ensure your wealth passes on to your family members and heirs, it will be important to consider tax strategies that will help make this possible.
There are different options to choose from including:
- Grantor Retained Annuity Trusts (GRATs): These trusts can be used to transfer appreciation on assets with minimal gift tax.
- Irrevocable Life Insurance Trusts (ILITs): These let you keep life insurance proceeds out of your taxable estate while still providing liquidity to your heirs.
- Charitable Remainder Trusts (CRTs): If you’ve always given to charity, this type of trust allows you to receive income for a determined period such as life or term. Then the remainder is passed to a charity, which can lead to a reduction in estate taxes. In addition, this option could provide a charitable deduction now.
Build a Strategy That Works for You
Before you choose a technique, you’ll want to think about your specific goals. You may want to minimize estate taxes, leave an impact on a charity, or provide a tax-efficient inheritance for your children or grandchildren.
As you consider your options, keep in mind that the U.S. tax code is complex. It’s important to work with an advisor who is aware of the different nuances and provide you with the information you need to see what will work best for your situation.
Together, you can create a plan that incorporates tax-efficient investment strategies like private equity deals that defer taxes and generate long-term gains, real estate investments that offer both income and depreciation benefits, and Opportunity Zone Funds with capital gains incentives. You can also review the benefits of insurance wrappers like PPLI for tax-free growth and wealth transfer techniques that protect what you’ve built.
If you’re earning at the highest levels, it’s time your investment strategy did the same.
As a next step, if you haven’t revisited your portfolio with an eye toward tax efficiency in the last 12 months, schedule a review with your advisor. The earlier you act, the more you can optimize for this year and the ones that follow.