Budgeting for High Net Worth Individuals

High net worth individuals face a tax system that stacks several layers most taxpayers never see, and the headline bracket is only the start. On top of ordinary income tax that tops out at 37 percent federally, high net worth individuals run into the net investment income tax, the additional Medicare tax, the loss of certain deductions at high income, the alternative minimum tax, and a state and city layer that in New York City can add another 14 percent or more. The result is that a high net worth individual often faces a true marginal rate well above 50 percent on the next dollar of income.

The mechanics depend on the type of income. Wages and business profit are taxed at ordinary rates and can trigger the 0.9 percent additional Medicare tax above 200,000 dollars single or 250,000 dollars married. Long-term capital gains and qualified dividends get preferential rates of 0, 15, or 20 percent, but high net worth individuals usually sit in the 20 percent band and also owe the 3.8 percent net investment income tax on top. The IRS summarizes the high-income picture across several pages, including its net investment income tax page, which every high net worth individual should understand.

Worked example. A high net worth individual realizes 500,000 dollars of long-term capital gains in a year with high other income. The federal capital gains rate is 20 percent, or 100,000 dollars, plus the 3.8 percent net investment income tax, another 19,000 dollars. Add New York State and New York City tax on that same gain, since the state taxes capital gains as ordinary income, and the high net worth individual can owe well over 40 percent on the gain in total. Timing and location of that gain change the bill materially. A high net worth individual who could spread the same gain across two tax years, or realize it in a year of lower other income, can shave the surtax and keep more of the gain, which is why the calendar matters as much as the asset itself.

We see this every year. A high net worth individual focuses only on the federal bracket and ignores the surtaxes and state layer, then is surprised when the effective rate on investment income lands near 40 percent. The surtaxes are not optional and they are not indexed, so they catch more high net worth individuals every year as the thresholds stay frozen at 200,000 and 250,000 dollars. Planning around them, not around the bracket alone, is what moves the needle for a high net worth individual.

The edge case is the high net worth individual with concentrated, low-basis stock or a liquidity event from a business sale. A single year can push a high net worth individual into every surtax at once and trigger the AMT, turning one transaction into a multi-layer tax problem. Spreading recognition, harvesting losses, and coordinating charitable gifts in the same year can soften it.

Another layer high net worth individuals face is the alternative minimum tax, a parallel system that disallows certain deductions and can raise the bill for a high net worth individual with large state tax payments, incentive stock options, or private activity bond interest. The AMT runs its own rate of 26 or 28 percent and a high net worth individual pays whichever system produces the larger tax. Exercising incentive stock options is the classic AMT trap, where a high net worth individual can owe tax on paper gains that have not been sold, so the exercise has to be timed and sized with the AMT in view.

Our tax strategy consulting maps the full stack for high net worth individuals before the income hits. To plan ahead of a big year, start at our new client inquiry page.

The net investment income tax is a 3.8 percent surtax on investment income that hits most high net worth individuals, and it sits on top of the regular capital gains and dividend rates. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds a fixed threshold, 200,000 dollars for single filers and 250,000 dollars for married filing jointly. Because those thresholds have never been indexed for inflation since the tax took effect in 2013, the net investment income tax reaches further into the high net worth individual population every year.

Net investment income includes interest, dividends, capital gains, rental and royalty income, and income from passive businesses. It does not include wages, active business income, or distributions from retirement accounts, though those distributions can raise your modified adjusted gross income and push more investment income over the line. The IRS explains the calculation and what counts in its net investment income tax guidance, which is the reference every high net worth individual and their preparer should work from. The tax is reported on Form 8960.

Worked example. A married high net worth individual has 600,000 dollars of modified adjusted gross income, of which 250,000 dollars is net investment income. The MAGI exceeds the 250,000 dollar threshold by 350,000 dollars. The surtax applies to the lesser of the two figures, so 250,000 dollars of investment income is taxed at 3.8 percent, an extra 9,500 dollars on top of regular capital gains tax. For a high net worth individual with a large portfolio, this surtax quietly adds tens of thousands across a few strong market years. Because the threshold is fixed and the markets are not, a high net worth individual who never planned for the surtax watches it grow into a larger share of the tax bill with each year of portfolio appreciation.

We see this every year. A high net worth individual treats the 3.8 percent as unavoidable and never plans around the MAGI threshold. But the surtax keys off MAGI, so anything that lowers MAGI, like maximizing retirement deferrals, bunching deductions, or harvesting capital losses, can pull investment income back under the line. A high net worth individual who manages MAGI deliberately often trims the surtax that a passive filer simply pays in full. Even the order in which a high net worth individual realizes gains and recognizes deductions within a single year can move investment income above or below the line, so the surtax rewards attention to sequence, not just to totals.

The edge case is the high net worth individual selling a business or a property. A large one-time gain can spike MAGI and expose the full year’s investment income to the surtax, while an installment sale spreading the gain across years can keep MAGI lower each year and reduce the total surtax. Loss harvesting in the same year directly offsets the net investment income figure.

One structural fix high net worth individuals use is to shift income away from net investment income where it makes sense. A high net worth individual who materially participates in a business converts what would be passive income into active income, which escapes the surtax, and tax-exempt municipal bond interest is excluded from net investment income entirely. For a high net worth individual in a high bracket, the after-surtax yield on a municipal bond can beat a taxable bond paying a higher stated rate, so the surtax quietly reshapes which investments actually pay a high net worth individual the most.

Our investment coordination service works with your advisors so a high net worth individual is not handed a surprise surtax. To plan around the 3.8 percent, start at our new client inquiry page.

The federal estate tax exemption lets a high net worth individual pass a set amount of wealth to heirs free of the 40 percent estate tax, and for 2026 that amount is 15,000,000 dollars per person. A married high net worth individual couple can shield 30,000,000 dollars combined with proper planning. Anything above the exemption is taxed at rates climbing to 40 percent at the federal level, which makes the exemption the single most important number for any high net worth individual thinking about legacy. Under current law the 15,000,000 dollar figure is now a permanent base indexed for inflation going forward.

The mechanics run through the lifetime exemption and the annual exclusion together. A high net worth individual can give away up to 19,000 dollars per recipient in 2026 without touching the lifetime exemption, and gifts above that draw down the 15,000,000 dollar lifetime amount. The IRS tracks the current figures on its estate and gift tax page. Portability lets a surviving spouse claim a deceased spouse’s unused exemption, but it requires filing an estate tax return to elect it, a step high net worth individuals skip at real cost.

Worked example. A widowed high net worth individual dies with a 25,000,000 dollar estate and a 15,000,000 dollar exemption. The taxable estate is 10,000,000 dollars, taxed near 40 percent, producing roughly 4,000,000 dollars of federal estate tax. Had this high net worth individual used annual exclusion gifts, a spousal portability election, and an irrevocable trust during life, much of that 4,000,000 dollars could have been removed from the estate. The difference between planning and not planning is measured in millions for a high net worth individual at this level. The earlier a high net worth individual starts, the more appreciation can be shifted out of the estate, which is why estate planning rewards a high net worth individual who acts at sixty far more than one who waits until eighty.

We see this every year. A high net worth individual assumes the federal exemption is so high that no planning is needed, then forgets that several states impose their own estate tax at far lower thresholds. New York taxes estates above roughly 7,000,000 dollars and has a cliff that can tax the entire estate, not just the excess, if you exceed the threshold by more than 5 percent. A high net worth individual living in New York can owe state estate tax with zero federal estate tax, which catches many families off guard.

The edge case is the high net worth individual with appreciating assets, like a business or real estate, who can use trusts to freeze today’s value in the estate and shift future growth to heirs. Grantor trusts, GRATs, and family entities let a high net worth individual move appreciation out of the taxable estate while retaining some control. These structures take years to set up well.

A point high net worth individuals miss is the value of the step-up in basis at death. Assets a high net worth individual holds until death generally pass to heirs at current market value, erasing the unrealized capital gain, which can be worth more than aggressive lifetime gifting for certain assets. The planning tension for a high net worth individual is real, because removing an asset from the estate to dodge estate tax also forfeits that step-up. Deciding which assets to gift and which to hold for the step-up is one of the sharper judgment calls a high net worth individual and their advisors make.

Our tax strategy consulting coordinates with estate counsel for high net worth individuals. To start estate planning, reach us at our new client inquiry page.

High net worth individuals lower their taxes by managing the timing, character, and location of income rather than chasing a single deduction, because at this level the planning is structural. The biggest levers for a high net worth individual are charitable strategy, capital gains timing, tax-aware investing, retirement and deferral vehicles, and entity-level workarounds for the state and local tax cap. No one move solves it. The savings come from coordinating several across a multi-year horizon, which is why high net worth individuals work from a plan rather than reacting each April.

Charitable giving is the cleanest lever. A high net worth individual who donates appreciated stock instead of cash deducts the full fair market value and skips the capital gains tax entirely. A donor advised fund lets a high net worth individual bunch several years of giving into one high-income year for a large deduction now, then grant to charities over time. The IRS explains the substantiation rules in its charitable contribution deduction guidance. For a high net worth individual in a 50-plus percent combined bracket, a 100,000 dollar gift of appreciated stock can be worth far more than its cash equivalent.

Worked example. A high net worth individual expects a 1,000,000 dollar bonus year and wants to give 250,000 dollars to charity over the next five years. By funding a donor advised fund with 250,000 dollars of appreciated stock in the bonus year, the high net worth individual takes the full deduction against the spike, avoids capital gains on the stock, and still grants to charities on the normal schedule. The deduction lands when the bracket is highest, which is exactly when a high net worth individual needs it most. The donor advised fund also separates the timing of the deduction from the timing of the giving, so a high net worth individual can lock in the tax benefit now and decide which charities receive the money over the years that follow, with no pressure to choose recipients in the high-income year itself.

We see this every year. A high net worth individual gives cash and sells stock separately, paying capital gains on the sale and getting a smaller relative benefit on the cash gift, when donating the stock directly would have done both jobs at once. The order of operations matters enormously for a high net worth individual. Selling first and giving second is almost always the wrong sequence when appreciated assets are on the table. A high net worth individual who simply asks the question, which assets do I already plan to give and which carry the largest unrealized gain, usually finds the answer points straight at donating the appreciated stock and keeping the cash.

The edge case is the high net worth individual with a concentrated position or a liquidity event, where loss harvesting, charitable remainder trusts, and qualified opportunity zone deferrals can each defer or reduce the tax. Coordinating these with a portfolio manager keeps the tax tail from wagging the investment dog.

High net worth individuals over age 70 and a half have one more clean lever, the qualified charitable distribution, which lets a high net worth individual send up to 111,000 dollars in 2026 directly from an IRA to charity. The distribution satisfies the required minimum distribution, never appears in income, and therefore lowers the MAGI that drives the net investment income tax and Medicare premiums. For a charitably inclined high net worth individual with a large IRA, the qualified charitable distribution often beats writing a personal check, because it cuts income at the source rather than offsetting it with a deduction.

Our investment coordination service and our tax strategy consulting build the multi-year plan a high net worth individual needs. To start, reach us at our new client inquiry page.

PTET, the pass-through entity tax, is a state-level workaround that lets high net worth individuals who own pass-through businesses get around the federal cap on the state and local tax deduction. The SALT deduction is capped at 40,400 dollars for 2026, which means a high net worth individual in a high-tax state like New York loses the federal benefit of most of the state income tax they pay personally. PTET restores that benefit by moving the state tax payment to the business level, where it is fully deductible against federal income.

The mechanics are clever. A high net worth individual who owns an S corp or partnership elects to have the entity pay New York State income tax on the business income. That tax is a business expense, fully deductible on the federal return with no SALT cap. The high net worth individual owner then receives a credit on their New York personal return for their share of the PTET paid, so the state tax is not paid twice. The IRS blessed this structure in its guidance on state and local tax deductions, which is why states rolled out PTET regimes.

Worked example. A high net worth individual owns an S corp earning 800,000 dollars and pays roughly 80,000 dollars of New York State tax on that income. Paid personally, only 40,400 dollars of that is deductible federally because of the SALT cap, wasting the federal benefit on nearly 40,000 dollars. Through PTET, the entity pays the 80,000 dollars and deducts the full amount federally. At a 37 percent federal rate, that extra roughly 40,000 dollars of restored deduction saves the high net worth individual around 14,800 dollars a year. For a high net worth individual who owns the business for a decade, that recurring saving compounds into well over 100,000 dollars, all from an election that costs little beyond meeting the annual deadline and filing the entity return correctly.

We see this every year. A high net worth individual with a pass-through business misses the PTET election deadline, which in New York falls early in the year, and forfeits the savings for the entire year. The election is annual and the date is firm, so a high net worth individual has to calendar it. Missing it once is a five-figure mistake that cannot be fixed retroactively, which is why we flag the deadline for every pass-through owner we work with.

The edge case is the high net worth individual who owns businesses in several states, each with its own PTET rules, election dates, and credit mechanics. The interaction across states and the resident credit can get complicated fast, and a wrong move can leave a high net worth individual double-taxed instead of saving.

A high net worth individual should also weigh PTET against the cash flow the entity gives up. Because the business pays the state tax, the high net worth individual receives smaller distributions in the year of payment and gets the benefit back as a credit at filing, which is a timing shift more than a free lunch. For most high net worth individuals the federal deduction more than justifies the wait, but a high net worth individual who depends on steady distributions should plan the entity cash flow around the PTET payment so the election does not create a personal liquidity squeeze mid-year. Coordinating the PTET payment with the owner’s distribution schedule keeps the federal saving intact while making sure a high net worth individual still has the cash on hand to meet personal estimated taxes and living expenses through the year.

Our corporate returns service handles the PTET election and the personal credit together so the high net worth individual captures the full benefit. To set up PTET correctly, start at our new client inquiry page.