Strategic Tax Planning: How to Keep More of What You Earn

Introduction

Tax planning is more than just filing your returns correctly each year. It’s about making financial decisions throughout the year that minimize your tax burden legally and sustainably. My name is Chris Wilbratte, and for the past 30 years, I’ve helped high-income professionals and business owners keep more of their hard-earned money through strategic tax planning.

Many people think tax planning is only for the ultra-wealthy, but that’s simply not true. Every taxpayer, regardless of income level, can benefit from proper tax strategies. Poor tax planning can cost you thousands of dollars each year that could be invested in your future.

Today, I’m going to walk you through proven tax strategies that can make a significant difference in your financial life. This isn’t about tax evasion or using shady loopholes—it’s about understanding the tax code and using it as it was intended.

Here’s what you’ll learn today:

• Why tax planning should be year-round, not just during tax season
• How business structures affect your tax liability
• Retirement account strategies that provide immediate tax benefits
• Real estate tax advantages most investors overlook
• Tax-loss harvesting techniques for investment portfolios
• Tax planning strategies for different life stages

Why Tax Planning Matters Now More Than Ever

The tax code changes frequently, with major overhauls occurring every few years. Understanding these changes and how they affect your financial situation is crucial for minimizing your tax burden.

I recently helped a client save over $37,000 through strategic tax planning. This wasn’t through complex maneuvers or risky schemes—it was through understanding the tax code and making decisions aligned with tax-efficient outcomes.

Tax planning isn’t just about reducing what you owe this year. It’s about creating a long-term strategy that accounts for your current situation and future goals.

When done correctly, tax planning becomes an integral part of your overall financial plan. It works alongside your investment, retirement, and estate planning strategies to build and preserve wealth.

The Foundations of Strategic Tax Planning

Before diving into specific strategies, it’s important to understand the foundations of tax planning. These principles apply regardless of income level or financial situation.

Tax Deferral vs. Tax Avoidance

Tax deferral means postponing taxes until a later date, while tax strategy refers to legally reducing your tax liability. Both are legitimate strategies when used appropriately.

Many retirement accounts offer tax deferral benefits, allowing your investments to grow tax-free until withdrawal. This can result in significant savings over time, especially if you expect to be in a lower tax bracket during retirement.

Tax strategy, on the other hand, involves structuring your finances in ways that minimize your tax liability. This might include maximizing deductions, timing income recognition, or choosing tax-efficient investments.

Income Timing and Recognition

When you recognize income can be just as important as how much income you recognize. Strategic timing of income and expenses can significantly impact your tax liability.

For business owners and self-employed individuals, this might mean delaying billing or accelerating expenses toward year-end to manage taxable income. For investors, it could involve timing capital gains recognition or harvesting losses to offset gains.

I worked with a business owner who was able to reduce his tax bill by $22,000 simply by delaying some December revenue until January and accelerating planned January expenses into December.

Tax Credits vs. Tax Deductions

Understanding the difference between tax credits and tax deductions is crucial for effective tax planning.

Tax credits directly reduce your tax bill dollar-for-dollar. For example, a $1,000 tax credit reduces your tax bill by $1,000 regardless of your tax bracket.

Tax deductions, on the other hand, reduce your taxable income. The value of a deduction depends on your tax bracket. For someone in the 24% tax bracket, a $1,000 deduction saves $240 in taxes.

Whenever possible, prioritize tax credits over deductions, as they provide more direct tax benefits.

Business Structure and Tax Implications

Your business structure significantly impacts your tax situation. Different entities—sole proprietorships, partnerships, LLCs, S corporations, and C corporations—have different tax treatment and potential benefits.

Sole Proprietorships and Pass-Through Taxation

Sole proprietorships are the simplest business structure, but they come with limitations from a tax perspective. Income flows directly to your personal tax return, which means you pay self-employment taxes (15.3%) on all business profits.

Pass-through entities like partnerships and LLCs also flow business income to your personal return, but they offer more flexibility in terms of profit distributions and expense allocations.

One significant advantage for pass-through entities is the Qualified Business Income (QBI) deduction, which allows eligible businesses to deduct up to 20% of their qualified business income.

S Corporations and Salary-Dividend Split

S corporations offer unique tax advantages through what’s known as the salary-dividend split. As an S corporation owner, you must pay yourself a reasonable salary, which is subject to employment taxes. However, additional profits can be taken as distributions, which aren’t subject to self-employment taxes.

This strategy must be used carefully, as the IRS scrutinizes “reasonable” salary determinations. The salary must reflect what would be paid for similar services in your industry.

I helped a consultant save over $33,000 annually by restructuring from a sole proprietorship to an S corporation and implementing a proper salary-dividend strategy.

C Corporations and Tax Reform Implications

The Tax Cuts and Jobs Act reduced the corporate tax rate to 21%, making C corporations more attractive for some businesses. However, C corporations face the challenge of double taxation—profits are taxed at the corporate level and again when distributed as dividends.

For businesses that reinvest profits rather than distributing them, or for those with significant fringe benefits, C corporations can offer tax advantages worth considering.

The right business structure depends on your specific situation, growth plans, and overall financial strategy. What works for one business may not work for another.

Business Owner Tax Strategies

Business owners have unique opportunities for tax planning that can result in substantial savings.

Maximizing Business Deductions

Business owners should take full advantage of legitimate business deductions, including:

• Home office deductions (when applicable)
• Business travel and meals
• Health insurance premiums
• Retirement plan contributions
• Business vehicle expenses
• Professional development and education costs

The key is maintaining thorough documentation and ensuring that expenses are ordinary and necessary for your business.

Family Employment Strategies

Hiring family members can provide tax advantages, including shifting income to lower tax brackets and creating retirement saving opportunities.

For example, hiring your children in a legitimate capacity allows the business to deduct their wages while providing them with earned income that can be contributed to retirement accounts or used for educational expenses.

I worked with a family business that saved over $8,400 annually by employing their three teenagers in the business during summer breaks.

Health Benefit Strategies

Business owners have several options for tax-advantaged health benefits:

• Medical Expense Reimbursement Plan (MERP)
• Health Reimbursement Arrangements (HRAs)
• Health Savings Accounts (HSAs) with high-deductible health plans
• Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs)
• Individual Coverage HRAs (ICHRAs)

These arrangements can provide tax-deductible health benefits for you and your employees while offering flexibility in plan design.

Business Succession and Exit Planning

Tax planning for business succession or exit is critical for maximizing the after-tax value of your business.

Strategies may include:

• Installment sales to spread capital gains over multiple years
• Qualified Small Business Stock (QSBS) exclusions
• Employee Stock Ownership Plans (ESOPs)
• Charitable remainder trusts

Planning should begin years before an anticipated exit to maximize available tax strategies.

Real Estate Tax Strategies

Real estate offers unique tax advantages that can significantly reduce your overall tax burden when properly structured.

Depreciation and Cost Segregation Studies

Property owners can deduct the cost of their investment property over time through depreciation. Residential properties are depreciated over 27.5 years, while commercial properties are depreciated over 39 years.

A cost segregation study can accelerate these deductions by identifying components of the property that can be depreciated over shorter periods (5, 7, or 15 years). This front-loads deductions, providing more tax benefits in the early years of ownership.

One client with a $1.2 million investment property was able to generate over $70,000 in additional first-year deductions through a cost segregation study, resulting in tax savings of approximately $26,000.

1031 Exchanges for Deferring Capital Gains

When selling investment property, 1031 exchanges allow you to defer capital gains taxes by reinvesting the proceeds into “like-kind” property. This strategy can help you grow your real estate portfolio without losing value to taxes.

These exchanges must follow specific rules and timelines, including identifying replacement property within 45 days and completing the exchange within 180 days.

Real Estate Professional Status

For those who qualify as real estate professionals (spending more than 750 hours annually in real estate activities), real estate losses can offset other income without being subject to passive loss limitations.

This status can be particularly valuable for couples where one spouse works full-time in real estate while the other has high W-2 income.

Opportunity Zone Investments

Opportunity Zones provide tax incentives for investing in designated economically distressed communities. Benefits include deferral of capital gains invested in Opportunity Zones, reduction of the tax owed on those gains, and potential elimination of taxes on gains from the Opportunity Zone investment if held for 10+ years.

Advanced Tax Mitigation Techniques

For those with more complex financial situations, several advanced tax strategies may be worth considering.

Charitable Giving Strategies

Strategic charitable giving can fulfill philanthropic goals while providing tax benefits:

• Donor-Advised Funds allow for an immediate tax deduction while distributing grants over time
• Qualified Charitable Distributions (QCDs) from IRAs can satisfy RMDs without increasing taxable income
• Charitable remainder trusts provide income while offering charitable tax deductions
• Donating appreciated securities avoids capital gains taxes while providing a deduction for the full market value

I helped a client establish a donor-advised fund to bunch multiple years of charitable contributions into a single tax year, allowing them to itemize deductions and save approximately $12,300 in taxes.

Trust Strategies for Tax Planning

Various trust structures can help manage tax liabilities:

• Intentionally Defective Grantor Trusts (IDGTs) for estate tax planning
• Charitable Remainder Trusts (CRTs) for income and estate tax benefits
• Qualified Personal Residence Trusts (QPRTs) for transferring home value with reduced gift tax
• Grantor Retained Annuity Trusts (GRATs) for transferring appreciation with minimal gift tax

These strategies typically require coordination between tax professionals and estate planning attorneys to implement correctly.

Opportunity Zone Investments

Beyond real estate direct investments, Opportunity Zone Funds provide a way to defer and potentially reduce capital gains taxes while supporting economic development in designated areas.

Investments held for 10+ years can exclude all appreciation from taxation, offering significant tax benefits for long-term investors with substantial capital gains.

Installment Sales for Business or Property

Selling business or investment property through an installment sale allows you to spread the gain—and the resulting tax liability—over multiple tax years.

This can prevent a large one-time spike in income that might push you into higher tax brackets while providing ongoing income.

Investment Tax Strategies

Strategic tax planning for your investment portfolio can significantly improve your after-tax returns over time.

Tax-Loss Harvesting

Tax-loss harvesting involves selling investments at a loss to offset capital gains realized elsewhere in your portfolio. This strategy can reduce your current tax liability while maintaining your overall investment allocation.

The key to effective tax-loss harvesting is avoiding the wash-sale rule, which prohibits repurchasing the same or “substantially identical” security within 30 days before or after the sale.

I helped a client offset a $75,000 capital gain from a business sale by strategically harvesting losses in their investment portfolio, saving approximately $17,850 in capital gains taxes.

Asset Location Optimization

Asset location involves strategically placing investments in the most tax-advantaged accounts based on their tax characteristics.

As a general rule:

• Hold tax-inefficient investments (those generating ordinary income or short-term capital gains) in tax-deferred accounts
• Hold tax-efficient investments (those generating qualified dividends or long-term capital gains) in taxable accounts
• Hold investments with the highest growth potential in Roth accounts

Proper asset location can add 0.25% to 0.75% to your annual returns without changing your investment strategy or taking additional risk.

Qualified Dividends and Long-Term Capital Gains

Qualified dividends and long-term capital gains (from investments held more than one year) are taxed at preferential rates—0%, 15%, or 20% depending on your income bracket, compared to ordinary income rates of up to 37%.

Structuring your portfolio to maximize these tax-advantaged forms of investment income can significantly reduce your tax burden.

Tax-Managed Funds and ETFs

Tax-managed mutual funds and ETFs are designed to minimize taxable distributions through various strategies, including low turnover, tax-loss harvesting, and managing dividend distributions.

ETFs generally offer tax advantages over mutual funds due to their creation/redemption process, which minimizes capital gains distributions.

For taxable accounts, these investment vehicles can provide significant tax savings compared to actively managed mutual funds with high turnover.

Retirement Account Strategies for Tax Efficiency

Retirement accounts offer some of the most powerful tax advantages available to individuals. Understanding these benefits and how to maximize them is essential for effective tax planning.

Traditional vs. Roth Accounts

Traditional retirement accounts provide upfront tax deductions but tax withdrawals in retirement. Roth accounts, on the other hand, offer no immediate tax benefits but provide tax-free withdrawals in retirement.

The choice between traditional and Roth accounts depends on your current tax bracket versus your expected tax bracket in retirement. If you expect to be in a higher tax bracket in retirement, Roth accounts generally make more sense.

For example: A physician earning $300,000 annually might benefit more from traditional 401(k) contributions now, while a young professional earning $60,000 with strong growth potential might prefer Roth contributions.

Backdoor Roth IRA Strategy

For high-income earners who exceed the income limits for direct Roth IRA contributions, the backdoor Roth strategy provides an alternative path.

This strategy involves making a non-deductible contribution to a traditional IRA and then converting it to a Roth IRA. While the conversion is technically taxable, the tax impact is minimal if you have no other traditional IRA assets (known as the “pro-rata rule”).

I’ve helped numerous clients implement this strategy successfully, allowing them to build tax-free retirement savings despite income restrictions.

Mega Backdoor Roth Strategy

For those with employer plans that allow after-tax contributions and in-plan Roth conversions, the mega backdoor Roth strategy can allow for significant additional Roth savings.

This advanced strategy can potentially allow you to contribute up to an additional $43,500 to Roth accounts (as of 2023), depending on your plan’s specific provisions and contribution limits.

Self-Employed Retirement Plans

Self-employed individuals have access to powerful retirement plans like SEP IRAs, SIMPLE IRAs, and Solo 401(k)s that allow for higher contribution limits than standard IRAs.

A Solo 401(k) can be particularly advantageous, allowing contributions as both an employee and an employer, potentially up to $66,000 per year (as of 2023, plus catch-up contributions for those 50 and older).

I worked with a self-employed consultant who was able to shelter over $50,000 of income from taxes using a Solo 401(k), saving approximately $18,500 in taxes for the year.

Tax Planning for Different Life Stages

Effective tax planning evolves as you move through different life stages. Here’s how to approach tax planning at each stage:

Early Career Tax Planning

In the early stages of your career, focus on:

• Building retirement savings, with an emphasis on Roth contributions
• Taking advantage of education tax credits and student loan interest deductions
• Establishing good recordkeeping habits for tax-relevant documents
• Understanding the tax implications of different income sources

Even modest tax savings during this phase can have a significant impact due to the power of compounding over time.

Mid-Career Tax Management

As your income grows and your financial situation becomes more complex, consider:

• Optimizing retirement contributions between Roth and traditional accounts
• Implementing college savings strategies using 529 plans
• Exploring investment tax strategies like tax-loss harvesting
• Considering charitable giving strategies to manage income taxes

This is often when tax planning becomes most crucial, as you’re likely in your highest earning years.

Pre-Retirement Tax Preparation

In the years leading up to retirement, focus on:

• Managing the tax impact of retirement account distributions
• Considering Roth conversion strategies during lower-income years
• Evaluating the tax implications of pension elections
• Planning for Required Minimum Distributions (RMDs)

Strategic planning during this phase can set the stage for tax-efficient income throughout retirement.

Retirement Tax Optimization

During retirement, key tax considerations include:

• Managing the taxability of Social Security benefits
• Strategically withdrawing from different account types to control taxable income
• Planning for Medicare premium surcharges based on income
• Implementing estate planning strategies to minimize taxes for heirs

The goal during retirement is to maintain your lifestyle while managing your tax burden to preserve your assets.

Common Tax Planning Mistakes to Avoid

Even well-intentioned taxpayers can make costly tax planning mistakes. Here are some common pitfalls to avoid:

Reactive Rather Than Proactive Planning

Many taxpayers think about tax planning only during tax filing season, when most strategic opportunities for the previous year have already passed.

Effective tax planning should be ongoing throughout the year, with regular reviews to adjust for changing circumstances or new tax laws.

Ignoring State and Local Tax Implications

While federal taxes often get the most attention, state and local taxes can significantly impact your overall tax burden.

Different states have vastly different tax approaches—some have high income taxes but low property taxes, others the reverse, and some have no income tax at all.

Understanding these differences is crucial for comprehensive tax planning, especially when considering relocation or property purchases in different states.

Overlooking Tax Coordination with Investment Strategy

Investment decisions made without considering tax implications can result in unnecessary tax costs that drag down your after-tax returns.

Working with advisors who understand both investment management and tax planning can help ensure your investment strategy is tax-efficient.

Failing to Plan for Tax Law Changes

Tax laws change frequently, and strategies that work today may be less effective or even counterproductive under future tax regimes.

Building flexibility into your tax planning and regularly reviewing your strategies with a tax professional can help you adapt to changing tax landscapes.

Working with Tax Professionals

While DIY tax preparation software has made tax filing more accessible, complex tax planning typically requires professional guidance.

When to Engage a Tax Professional

Consider working with a tax professional if you:

• Own a business or rental property
• Have significant investment assets
• Experience major life changes (marriage, divorce, children, retirement)
• Receive equity compensation
• Have multiple income sources
• Plan to sell significant assets
• Have international tax considerations

The right tax professional can save you multiples of their fee through effective tax planning.

Choosing the Right Tax Team

Different tax professionals offer different expertise:

• CPAs typically offer the broadest tax expertise and can represent you in IRS matters
• Enrolled Agents specialize in tax issues and have unlimited practice rights before the IRS
• Tax attorneys focus on complex legal tax matters and offer attorney-client privilege
• Financial advisors with tax expertise can help integrate tax planning with overall financial planning

For complex situations, a team approach may be most effective, with different professionals handling different aspects of your tax planning.

What to Expect from Strategic Tax Planning

Working with tax professionals should involve more than just annual tax preparation. Expect:

• Proactive planning meetings, typically quarterly or semi-annually
• Year-end tax projections and planning
• Strategies tailored to your specific financial situation
• Coordination with your other financial advisors
• Updates on relevant tax law changes
• Documentation of tax strategies for implementation

How Our Wealth Management Firm Approaches Tax Planning

At [Firm Name], we believe tax planning is an integral part of wealth management. Our approach involves:

• Comprehensive tax review during the onboarding process
• Integration of tax planning with investment, retirement, and estate planning
• Regular tax planning meetings with clients
• Collaboration with clients’ CPAs or our in-house tax team
• Proactive identification of tax-saving opportunities
• Tax-efficient investment management
• Strategic Roth conversion planning
• Business entity optimization

We’ve helped our clients save millions in taxes through strategic planning that addresses both immediate tax concerns and long-term tax efficiency.

Wrapping Up

Strategic tax planning is a powerful tool for building and preserving wealth. By understanding the tax implications of financial decisions and implementing targeted strategies, you can significantly reduce your tax burden while remaining fully compliant with tax laws.

The strategies discussed in this article represent just a portion of the tax planning opportunities available. The most effective approach combines multiple strategies tailored to your specific financial situation, goals, and risk tolerance.

Remember that tax planning isn’t a one-time event but an ongoing process that evolves with your financial life and changes in tax laws. Regular reviews and adjustments are essential for maintaining tax efficiency over time.

What you’ve learned today:

• Tax planning strategies for various income sources and asset types
• Business structure considerations for tax optimization
• Retirement account strategies for tax-efficient savings
• Real estate and investment tax planning techniques
• Life stage-specific tax planning approaches
• Advanced tax mitigation techniques for complex situations

How Our Financial Experts Can Help

Our team of Certified Public Accountants and financial advisors specializes in developing comprehensive tax strategies for high-income professionals, business owners, and retirees.

We go beyond traditional tax preparation to provide proactive tax planning that integrates with your overall financial plan. By identifying tax-saving opportunities throughout the year, we help you keep more of what you earn and build wealth more efficiently.

If you’re ready to take a more strategic approach to tax planning, contact us for a complimentary tax review. We’ll analyze your current tax situation and identify potential strategies to reduce your tax burden, both now and in the future.