Are you a “HENRY”? High Earner, Not Rich Yet (HENRY) is a term used to describe a person who has high income or the potential for high future wealth (think the founder of a startup) but currently has assets tied up in lifestyle expenses. So why do so many HENRYs feel they have little to no actual wealth? Despite substantial incomes, many find themselves lacking significant savings or investments.
This article explores essential tax planning strategies that HENRYs can use to potentially reduce their tax liability and help build long-term financial stability.
Look Ahead to Retirement
One strategy for building long-term financial stability is to make the most of contributions to tax-deductible retirement accounts, such as your company’s 401(k) or 403(b) plan. Payroll deductions help automate these contributions, ensuring the money is saved before it can be spent. If you are self-employed, consider establishing a SIMPLE IRA, SEP-IRA, or solo 401(k) (if you work alone) for your business. Remember to monitor the maximum contribution limits, as they are scheduled to increase each year under current tax law.
Plan for Future College Costs
If you have children, or are planning to, consider opening or adding contributions to Section 529 college savings accounts. Eventual distributions are federal and state tax-free when used for qualified educational expenses (now including K-12 private tuition and paying student loans). While contributions are generally not federally tax-deductible, many states, including Utah, offer income tax deductions or credits to those who open accounts sponsored by their resident state, and nine states allow state tax deductions for contributions to out-of-state plans too.
Fully Utilize Employer Benefits
Health savings accounts (HSAs) are special accounts that provide a triple tax advantage, even if your employer does not offer a high-deductible healthcare plan. Contributions are tax-deductible, earnings grow tax-deferred, and distributions are tax-free as long as they’re used for qualifying medical expenses after age 65. Additionally, these accounts are completely portable, allowing you to take them with you wherever you go.
Flexible spending accounts (FSAs) are also special medical savings accounts offered through employers. These are tax-deductible accounts with annual contribution limits that help pay for medical expenses such as copayments and deductibles each year. The IRS requires FSA accounts to be spent down by the end of each year (except for a $640 carry-over exception in 2024), so be careful how you utilize these accounts.
Exercising stock options should not be done without careful tax planning. Depending upon whether you have Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NSOs), there are tax pitfalls to avoid and many tax strategies to employ. Make sure you consult with your tax advisor and a wealth manager on how to best manage stock options for your own unique situation.
Be More Charitable
Donating to charitable causes is a time-honored method of tax reduction. Each donated dollar is a deduction against income for tax purposes. Even if you don’t have a favorite charity at the moment, donor-advised funds (DAFs) are special charitable accounts that allow current-year contributions and tax deductions, but distributions to qualified charitable organizations may be made in future years as the growth in these accounts accumulate tax-deferred.
Taxable IRA distributions in retirement may also be offset by making a qualified charitable distribution (QCD) election, instructing the account custodian to transfer the IRA distribution directly to the charitable organization, thereby qualifying the distribution for a tax deduction.
Harvest Losses in Taxable Investment Accounts
To avoid excessive capital gains in taxable investment accounts, take a look at current investments and see where losses may be realized now to offset gains later in the year. Remember the “wash sale” rule that requires a waiting period of 30 days before sold investments can be repurchased and the loss incurred on the sale can still be deducted.
Timing of Deferred Comp and Bonuses
Special attention should be paid to deferred compensation and bonuses. Strategically spreading these types of extra income over separate tax years can help lower tax liability. Depending upon the rules of your employer’s plan, deferring compensation into your retirement years or during years of high offsetting income deductions can be beneficial.
Speaking of Tax Deductions…
Are you taking all the deductions you can within your business? Or, if you are a HENRY within a corporation, are you including the money you’re spending on business matters as deductible unreimbursed business expenses? Consult with a tax advisor; there may be many deductions you could lump into a calendar year to maximize your tax benefits.
Making the Right Tax Election
LLC or sole proprietor? S-Corp or C-Corp? What about a partnership? Selecting the right entity for your business carries significant tax implications, and there are many misconceptions about which entity is the most tax beneficial overall. (Hint: An S-Corp is not necessarily the default election.)
Avoid Taxes on Your Business Growth Through a QSBS Exclusion
What if I told you that in some states (such as Utah), $10 million of capital gains via the growth of your small business could be potentially excluded from taxes? With some strategic planning, it’s possible! This is accomplished through a QSBS (or Qualified Small Business Stock) election and carefully following the rules and requirements. It may also be possible for certain executives receiving company stock in the form of ISOs or NSOs to avoid capital gains taxes on these important benefits.
Have an Experienced Wealth Manager on Your Team
At Solidarity Wealth, we provide proactive (not reactive) solutions to help minimize your tax exposure. Since our team consists of former tax and estate planning attorneys and tax accountants, we are well-positioned to provide in-depth strategies and services that address your unique needs and objectives.
If you’re looking to craft a mindful, effective strategy that aligns with your personal aspirations, let’s have a conversation. Connect with us and let us help you realize your life vision.
About Jeff
For over a dozen years, Jeff McClean has advised some of the country’s most successful families on all aspects of their wealth. With his background as a former tax and estate planning attorney at a prominent Houston, Texas, law firm, Jeff has advised clients through business sales, funding rounds, IPOs, complex tax and wealth planning transactions, private and public market investments, executive compensation packages, succession planning, and much more. In short, Jeff helps clients navigate the unique challenges that come with building wealth and helps them better predict their financial future.
In addition to co-founding Solidarity Wealth, Jeff advises single-family offices on a broad array of challenges. He also serves as the Managing Partner of Solidarity Capital, an income fund managed separately by the Solidarity partners.
Jeff is a sought-after thought leader on a wide range of tax, finance, and estate planning topics. Jeff has been quoted in Yahoo! Finance and Kiplinger’s, has published in diverse publications from Silicon Slopes magazine to the Taxation of Exempts journal by Thomson Reuters, and has spoken to audiences ranging from the Estate Planning Section of the Utah State Bar to the Nonprofit Organizations Institute to large company conferences.
Jeff holds a bachelor’s degree in accounting from Brigham Young University – Idaho and a Juris Doctor, with honors, from the University of Texas School of Law. Outside of work, Jeff is married and the father of three amazing children. He has also served as past president of the Salt Lake Estate Planning Council.
Solidarity Wealth is a registered investment adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Solidarity Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Solidarity Wealth unless a client service agreement is in place.
