As you start saving money, building wealth, and collecting possessions, there are some unwritten rules you should know before you reach a seven-figure net worth. For example, you should add liability insurance coverage to protect your growing investment portfolio and avoid the temptation to buy luxury items just because you have more money to spend. Additionally, once you reach a certain amount of liquid assets (usually $1 million), you should become more focused on protecting your wealth from taxes.
Reaching the $1 million figure generally means you are now considered a high-net-worth individual, so you may need to adjust the focus of your tax planning strategies rather than your strategies for building your assets. You should also upgrade your estate plan to $1 million. Your pre-$1 million tax plan may focus on making sure your retirement account contributions are maxed out, thereby reducing your net income and helping you move to a lower income tax bracket. However, once you hit $1 million, finding other strategies to reduce your tax burden – such as maximizing charitable donation deductions and minimizing capital gains taxes – should become your focus.
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One of the many mistakes that mass affluent individuals often make when managing their wealth is failing to fully understand capital gains taxes. A 2026 study by Long Angle showed that since more than 90% of high-net-worth individuals’ assets tend to be invested in stocks and other investments, capital gains taxes often affect them. In fact, the Tax Foundation estimates that the federal government will collect more than $1 trillion in capital gains taxes between 2022 and 2025. That being said, if you don’t have a solid strategy in place, you could end up paying more than your fair share in taxes.
To avoid paying hefty capital gains taxes when your liquid assets exceed $1 million, you need to carefully monitor the timing of sales of the stocks and bonds you use as investments. When you sell an asset after holding it for less than a year, the tax rate on any gain could be as high as 37%. However, if you hold the asset for more than a year, it’s usually considered a long-term gain – and the tax rate can be as high as 20%. If you find this topic confusing, don’t be afraid to ask for help. The best strategy for most people is to meet with a tax planning professional as soon as they hit the $1 million mark and start feeling the pinch of capital gains taxes.
When you reach $1 million in liquid assets, you may want to use some of the money to do some good or even leave a legacy. Plus, helping people and organizations in need not only makes you feel good, it can also reduce your tax bill. However, simply writing random checks to your favorite charity is not an effective strategy for reducing your taxes. Instead, a tax planner may recommend setting up a donor-advised fund (DAF). By doing this, you can make a grant from this DAF to your desired charity at any time in the future. Logically, all you have to do is contribute to a DAF in order to receive the full tax deduction for those contributions. Additionally, investments within a DAF grow tax-free. However, once you contribute to a DAF, you cannot withdraw the funds for your own use.
This kind of charitable donation can be a reliable way to offset capital gains. If your assets will incur significant capital gains tax when sold, you can donate those assets to charity or a DAF. When you make this type of donation, not only do you avoid capital gains taxes, you can also deduct the full market value of the appreciated asset from your taxes—as long as you don’t exceed the income limits set by tax laws.
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