Tax Strategies for High-Income Earners in 2025
The IRS building in Washington, D.C. has recently been in the news, particularly with the announcement of potential job cuts impacting around 6,700 employees. This restructuring raises concerns about how it might affect tax collection during the important filing season.
For those with considerable wealth, there’s been a ticking clock for seven years regarding tax benefits that are set to expire at the end of 2025. While the One Big Beautiful Bill Act has made many provisions permanent, there’s still a sense that the continually shifting tax landscape demands careful planning.
Now that tax season has wrapped up for this year, it’s worth looking at five crucial strategies that affluent investors and high earners may want to consider as they look ahead.
1. Long-Short Loss Recovery
Last year’s tax changes raised the estate tax exemption from $13.99 million to $15 million for individuals, a shift from earlier plans to reduce this by half by 2025.
This new threshold shifts focus from estate taxes to managing income and capital gains more effectively. Mitchel Drosman, who leads national wealth strategy at Bank of America, emphasized the importance of minimizing capital gains, particularly with the S&P 500 rising over 75% since early 2023.
“For me, the significant tax narrative is the capital gains and investment aspect,” he stated, highlighting the substantial gains many of his clients are experiencing.
Investors are gravitating towards long-short tax loss recovery, a more aggressive tactic to mitigate capital gains. In this strategy, investors sell off losing assets to offset gains on others but also acquire short positions expected to decline, all while holding onto long positions anticipated to rise.
“Market fluctuations create a broader asset base to recover losses from,” Drosman noted, adding that investors still maintain a balanced overall portfolio.
2. Bonus Depreciation
The current tax bill has modified bonus depreciation, allowing businesses to deduct the total cost of qualifying assets like machinery and vehicles in their inaugural year of use.
Adam Rudman from JPMorgan Private Bank explained that many business clients are making strategic investments with this in mind. Real estate developers, for example, are assessing which property components can be depreciated rapidly. A parking structure might take 15 years, while a commercial building could take 39 years.
3. Change of Address
Several states with Democratic leadership are considering fresh taxes targeting high earners, especially as federal aid decreases. California might keep its millionaire tax proposal on an upcoming ballot, while recent legislation in Maine and Washington introduces millionaire taxes.
Jane Ditelberg from Northern Trust Wealth Management noted that this has led many clients to investigate how to adapt their tax status. Some states, like Delaware, have advantageous trust income laws that can help residents sidestep state taxes by forming a trust.
Jere Doyle from BNY Wealth remarked that changing one’s address can be the simplest method to escape taxing authorities, though it’s not always straightforward. He shared experiences of clients relocating to New Hampshire to establish residency before selling businesses, but advised that intentions need to be clear; otherwise, relocating might not suffice to evade taxes in their original states.
“It’s a common misconception that just spending some time in another state makes you a resident,” he warned. “Each state has different requirements regarding where you vote, register your car, and other essential affiliations.”
4. Distribution of Charitable Gifts
Last year’s tax reforms have slightly hampered the charitable donation landscape, particularly affecting high-income earners.
Starting now, itemized donors can only deduct charity contributions exceeding 0.5% of their adjusted gross income (AGI). Moreover, for those in the 37% tax bracket, the reduction of itemized deductions brings their effective tax rate down to around 35%.
Ditelberg noted many clients rushed to enhance their philanthropic contributions before these rules kicked in, suggesting a future trend of grouping donations in bigger amounts for tax efficiency.
5. Opportunity Zone
The tax legislation introduced incentives for deferring asset sales, including making the Qualified Opportunity Zone program a permanent fixture. This allows investors to postpone capital gains by reallocating them into funds focused on low-income regions.
Although established during the first Trump administration, the current framework only permits tax deferrals until the year’s end. New Opportunity Zones are expected to deliver more benefits, especially for investors in rural locales, with significant reductions in capital gains tax available over five-year holdings.
Ditelberg reminded investors of the crucial 180-day window for rolling over benefits, but noted these newer rules won’t materialize until 2027. “If you plan to capitalize on Opportunity Zone deferrals, you might want to wait until later in the year,” he advised, adding that second-half gains could prove favorable.
Nevertheless, some investors remain cautious, recalling past underperformance from previous Opportunity Zone ventures. “It’s essential not to let taxes dictate investments too heavily,” Drosman cautioned. “There’s inherent risk that every investor should acknowledge.”
