Tax Planning for High-Net-Worth Individuals

Most financial advisors focus on investment returns. The advisors who move the needle for $5M+ households focus on after-tax returns — because at this wealth level, the difference between a 37% + 3.8% federal burden and a well-planned 23.8% rate on the same investment gains is $140,000+ per year on a $10M portfolio. Tax strategy isn't an afterthought; it's the largest lever available.

Your effective rate picture at $5M+

High-net-worth households face a layered tax structure that's easy to underestimate. On ordinary income (dividends, interest, Roth conversions, short-term gains) in the top bracket, the all-in marginal rate is:

• Federal income tax: 37% (2026 MFJ threshold: $768,700)¹
• Net Investment Income Tax (NIIT): 3.8% on investment income above $250,000 (MFJ)²
• State income tax: 0% (TX, FL, WA, NV) to 13.3% (California)

On a California resident with $2M of ordinary investment income, the marginal federal + state rate reaches approximately 50.8%. On long-term capital gains at the top rate (20% + 3.8% NIIT + state), California residents face approximately 37.1%. New York residents face 33–34%. Even moving to a no-income-tax state still leaves the 23.8% federal floor on LTCG income.

Net Investment Income Tax: the 3.8% surcharge

The Net Investment Income Tax (IRC § 1411) imposes an additional 3.8% on the lesser of (a) your net investment income, or (b) the amount your MAGI exceeds $200,000 (single) / $250,000 (married filing jointly).² These thresholds have never been inflation-adjusted since the tax was enacted in 2013 — at $5M+ of assets, you almost certainly pay it on virtually all your investment income.

What NIIT covers:

• Interest, dividends, and annuities from non-business activity
• Royalties and rents (unless from an active trade or business)
• Net gains from property sales (including LTCG, gain on home sales above the exclusion)
• Passive business income (from partnerships, S-corps, or rental activity where you're passive)

What NIIT does not cover:

• Wages, salary, self-employment income
• Active business income (non-passive S-corp and partnership income)
• Distributions from IRAs and 401(k)s (these are taxed as ordinary income, but not as NII)
• Tax-exempt municipal bond interest (though it does add to MAGI)
• Qualified retirement plan distributions

Interactive NIIT Calculator

Estimate your Net Investment Income Tax liability and effective all-in rate on investment income:

Capital gains: the 23.8% federal floor

Long-term capital gains (assets held >12 months) receive preferential rates: 0%, 15%, or 20% depending on income. For married couples filing jointly in 2026, the 20% rate applies to LTCG above $613,700 of taxable income.¹

But high earners pay NIIT on top: 20% federal LTCG + 3.8% NIIT = 23.8% federal floor on long-term gains. Add state: California residents pay a combined 37.1%, New York residents about 33.9%. Texas and Florida residents face only the 23.8% federal rate.

The planning goal isn't to eliminate capital gains taxes — it's to defer, harvest losses against gains, donate appreciated stock instead of selling it, or otherwise reduce the taxable gain. See the Direct Indexing TLH Calculator and DAF guide for the quantitative case on each approach.

Alternative Minimum Tax post-OBBBA

The One Big Beautiful Bill Act (OBBBA, July 2025) made significant changes to the AMT. The key 2026 values:³

• AMT exemption (MFJ): $140,200 — begins phasing out at $1,000,000 of AMTI at a 50% rate
• AMT exemption (single): $90,100 — begins phasing out at $500,000 of AMTI
• AMT rate: 26% on first $232,600 of AMTI over exemption; 28% above that

The phaseout mechanics: for every dollar of AMTI above $1,000,000 (MFJ), the exemption shrinks by $0.50. The exemption is fully eliminated at $1,280,400 of AMTI for married couples. Above that, the AMT is calculated directly on AMTI at 26–28%, with no exemption offset.

Who still hits AMT at $5M+? The most common triggers:

• ISO exercise: The spread on incentive stock option exercise is an AMT preference item — the primary reason executives with large ISO grants face AMT in high-income years. Model the ISO exercise before executing.
• High-deduction combinations: Large state and local taxes (if the SALT cap is eventually modified), accelerated depreciation on real estate, and other preference items can push AMTI above the exemption even without ISOs.
• Very high ordinary income years: At $1M+ of AMTI after exemption phaseout, AMT rates (26–28%) can exceed regular rates in the 32% bracket — but at the 37% bracket, regular tax typically dominates.

QBI deduction for business owners (§199A)

If you own a pass-through business — sole proprietorship, partnership, S-corporation, or LLC — the OBBBA made the § 199A Qualified Business Income deduction permanent and increased it to 23% (from 20%).⁴

For Specified Service Trade or Business (SSTB) owners — financial advisors, attorneys, physicians, consultants, and others — the deduction phases out above income thresholds:

• Phaseout begins: $394,600 (MFJ) / $197,300 (single) of taxable income
• Fully phased out: $544,600 (MFJ) / $272,300 (single)

For non-SSTB business owners, the deduction continues above the threshold subject to W-2 wage and qualified property limits. A physician owning a medical practice or a real estate operator with $5M+ of assets often has meaningful QBI deduction available — worth $23,000–$115,000 per year in federal tax savings on $100K–$500K of qualifying QBI.

State income tax: the biggest variable

State income tax creates the widest planning range of any variable. A household with $1M of investment income faces:

*Washington has no income tax but has an estate tax with a ~$3M exemption. Values are approximate and vary by income level. Consult a CPA for your state-specific rate.

Legitimate domicile changes to a no-income-tax state can save $100,000+ per year for HNW families with high investment income. But state tax authorities — California and New York especially — aggressively audit claimed residency changes. A credible move requires a genuine primary-home change, severing California/New York community ties, and maintaining contemporaneous records (credit card usage, cell phone location, voter registration). An advisor experienced in residency planning can document this properly.

Core tax-reduction strategies

1. Asset location across account types

The single most underutilized strategy for HNW households: placing tax-inefficient assets (bonds, REITs, short-term holdings) in IRAs and Roth accounts, and placing tax-efficient assets (municipal bonds, broad index funds, buy-hold equity) in taxable accounts. Done correctly, this reduces NIIT exposure and shifts more of the portfolio's income into tax-preferred vehicles. See the Asset Location Optimizer for the quantitative analysis.

2. Direct indexing for systematic tax-loss harvesting

At $500K+ in a taxable account, direct indexing (holding individual stocks rather than a fund) enables continuous tax-loss harvesting — offsetting realized gains with individual-stock losses within the same index exposure. At $5M of taxable assets, annual tax alpha from TLH is typically $50,000–$100,000 in deferred tax liability. See the Direct Indexing Calculator.

3. Roth conversion in low-income years

Moving traditional IRA assets to Roth during years when ordinary income is lower (early retirement, before RMDs, after a business sale) fills lower brackets at 24% or 32% rather than waiting until RMDs force distributions at 37%. The trade: pay tax now, on your terms, at a predictable rate. See the full Roth Conversion Strategy guide for the fill-the-bracket model and IRMAA cliff analysis.

4. Charitable giving structures

Donating appreciated stock directly to charity (or to a Donor-Advised Fund) eliminates the embedded capital gain entirely and generates a full fair-market-value deduction. On a $100K position with an $80K gain, direct donation vs. selling-then-donating saves $80K × 23.8% = ~$19,000 in federal capital gains + NIIT. Bunching several years of charitable giving into one DAF contribution can also push you into itemizing in the bunching year, generating a larger deduction than the standard deduction would otherwise allow.

5. Concentrated-stock diversification strategies

A large single-stock position — 40% of net worth — creates both tax and concentration risk. Exchange funds, Charitable Remainder Unitrusts (CRUTs), and gradual sell-down strategies with TLH offsets can reduce the position over time while minimizing the immediate tax event.

6. Business income structuring

If you own a business generating $500K+ of annual income, the form of that income matters for NIIT: active non-SSTB business income generally isn't subject to NIIT, while passive business income is. Entity structure (S-corp vs. partnership vs. C-corp), reasonable compensation elections, and the passive/active grouping rules under Treas. Reg. § 1.469-4 can shift income categories meaningfully.

The tax-integrated advisor advantage

Wirehouse advisors manage the investment portfolio. Fee-only RIAs who specialize in HNW clients coordinate the investment portfolio, tax strategy, estate plan, and cash-flow plan into a single internally consistent strategy. The difference isn't philosophical — it's measurable:

• A wirehouse advisor at 1.1% AUM on $10M = $110,000/year in fees
• A fee-only RIA at 0.5% = $50,000/year in fees + $50,000–$100,000/year in after-tax alpha from TLH, Roth conversion optimization, and asset location

The gap: $110,000–$160,000 annually — before considering whether the wirehouse account has the tax-loss harvesting infrastructure to run direct indexing at all. Read the full Wirehouse vs Fee-Only RIA comparison for a complete fee and service breakdown.