High-net-worth investors may be able to use advanced, legally compliant income-shifting strategies to improve tax efficiency and support legacy goals. Learn the factors and risks to consider.  

Advanced Tax Strategies for Shifting Income to Reduce Your Burden

For high-net-worth individuals, strategic income shifting is a form of tax planning that involves moving income from a higher-tax environment to one where it may be taxed at a lower rate. This can be done through legal methods that are fully compliant with tax regulations, such as reallocating income to family members in lower tax brackets, placing assets in accounts with more favorable tax treatment, or deferring income to future years when rates could potentially be lower.

Income-shifting strategies can be effective in certain situations but may not be appropriate for every investor. In consultation with a qualified advisor, you may want to consider this approach if:

• Your income is subject to higher marginal tax rates, and you want to explore ways to reallocate it.
• You have family members in lower tax brackets who may benefit from receiving certain income streams.
• You hold assets in multiple account types and want to review placement for tax efficiency.
• You have significant capital gains and want to manage their impact.
• You have philanthropic or estate goals that could align with tax planning.
• You operate across multiple jurisdictions and need to consider tax treaties and local laws.

7 Income-Shifting Strategies for Reducing Your Tax Burden

Beyond the potential for improving the tax efficiency of an investment portfolio, income-shifting could be used to transfer wealth to future generations by directing income into trusts or family-owned entities. Charitable initiatives can be funded more efficiently by donating appreciated assets, which may reduce taxable gains while supporting philanthropic goals.

Income-shifting could also potentially help you gain greater control over cash flow by timing when income is recognized—such as deferring bonuses or capital gains to years when overall taxable income is lower.

These strategies are not right for everyone, and their effectiveness is not guaranteed. The suitability of each option depends on factors such as income structure, jurisdiction, time horizon, and long-term objectives. A professional advisory team can help determine which strategies fit your situation and how to implement them in compliance with applicable tax laws.

1. Income Splitting & Family Structuring

Income splitting involves shifting taxable income to family members in lower tax brackets, reducing the overall family tax bill. This can be done through vehicles such as spousal retirement accounts, prescribed-rate loans, family partnerships, or trusts. Implementation requires adherence to attribution rules and jurisdiction-specific regulations.

2. Asset Location & Income Type Optimization

Placing tax-inefficient assets such as bonds or REITs in tax-deferred accounts, while keeping tax-efficient assets like index funds in taxable accounts, can improve after-tax outcomes. Shifting toward income types with preferential rates, such as qualified dividends or long-term capital gains, can also help reduce the tax burden on investment returns.

3. Retirement Vehicles & Deferred Compensation

Maximizing contributions to tax-advantaged retirement accounts can defer taxable income and allow earnings to grow without current taxation. In some cases, converting to a Roth account during lower-income years could secure future tax-free growth. Deferred compensation plans may also help shift income into years when tax rates may be lower.

4. Charitable Vehicles & Estate Planning Tools

Charitable giving, especially through donations of appreciated assets, may lower taxable income and help avoid some capital gains taxes. More advanced structures such as charitable remainder trusts, discretionary family trusts, or family investment companies can provide additional ways to shift income while aligning with estate and legacy planning.

5. Tax-Efficient Investments & Tax-Loss Harvesting

Selling underperforming investments to offset realized gains, while staying within wash-sale rules, could help reduce taxable income. Direct indexing and other technology-driven approaches allow for ongoing tax-aware adjustments that integrate with broader portfolio management.

6. High-Value Insurance Structures (PPLI)

Private Placement Life Insurance allows certain qualified investors to hold investments such as hedge funds or private equity within a life insurance wrapper. This structure could potentially offer tax-deferred growth and estate planning benefits, but it is complex and requires specialized administration.

7. Timing & Policy-Responsive Planning

Adjusting the timing of income recognition and deductions could be beneficial. This may involve accelerating income into a lower-tax year or deferring it if higher taxes are expected to apply later. Staying aware of proposed and enacted tax law changes is critical when applying this approach.

Key Considerations and Potential Risks

While income shifting strategies can potentially offer some benefits, they also come with important considerations and risks:

• Complexity and cost: Many approaches require formal legal structures, specialized administrative support, or regular oversight, which can be time-consuming and costly to maintain.
• Regulatory changes: Tax rules evolve, and provisions that allow favorable treatment today may be amended or eliminated in the future, impacting the effectiveness of a strategy.
• Compliance requirements: Accurate documentation, timely reporting, and adherence to specific rules are essential to maintain tax benefits and avoid penalties or audits.
• Integration with overall plan: These strategies should be evaluated in the context of your liquidity needs, estate planning priorities, risk tolerance, and long-term investment approach to avoid unintended consequences.
• Jurisdictional issues: For investors with cross-border holdings or multi-state residency, differences in tax law and reporting requirements can add layers of complexity that require coordinated professional advice.

How EP Wealth Helps Clients Evaluate Advanced Tax Strategies

EP Wealth financial planning advisors work with clients and their tax and legal advisors to identify strategies that may help shift income in a compliant and effective way. Our process includes reviewing your overall portfolio, assessing potential income-shifting opportunities, and evaluating structures that may support your financial and legacy goals. Contact an advisor near you to discuss your needs.

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• Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
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• Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.    
• EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. All expressions of option are subject to change without notice.
• All investment strategies have the potential for profit or loss. Different types of investments and investment strategies involve varying degrees of risk, and there can be no assurance that any specific investment strategy will be suitable or profitable for a client’s portfolio. The risk of loss can never be eliminated even if working with a professional.
• Laws vary by state. The information presented herein is intended to be general in nature and may not apply to your state of domicile. Please consult local legal counsel to determine the best practices for your state.
• Please consult with a CPA, tax professional, and/or attorney regarding your specific situation before implementing any of the strategies referenced directly or indirectly herein.
• There is no guarantee that all the services detailed herein will be offered to a client. The services EPWA offers clients is dependent on the requirements of each client. In many instances, clients or prospective clients may not have a need for all or some of the services detailed.