Most high earners treat taxes like a bill that arrives once a year. The ones who keep more of their money treat it like a strategy they’re always running.
By Salem Desir · Tax Attorney · DesirLegal.com
Most people never ask their CPA one simple question what are we doing to make sure I pay less tax this year. Typically, if the answer is we’ll figure it out when we’re doing your taxes, that’s more likely to be just tax preparation and not tax strategy. If you’re a high earner, the difference between those two things could be in the 10s of thousands of dollars.
“Tax preparation looks to the past tax strategy looks to the future. One of them reflects your financial history for the year and the other shapes it.”
The problem with waiting until April
By the time tax season comes around and you sit down with your accountant all your tax liability has already been decided now it’s just being documented and sent to the IRS. Any deductions or income have already been calculated and at this point it’s pretty much too late to try and change anything.
For an appropriate tax strategy, you really need to start planning in January or, if you’re really on point, the preceding October. You need to ask yourself questions like: Have I exhausted all the deductions available to me in my tax bracket? Should I accelerate income into this year or defer it? Is my business structured in such a way as to create the most tax efficiency? Am I using the right retirement vehicles? Am I prepared for the most tax efficient exit?
See, these moves won’t get you in trouble with any tax authority. Most of these strategies have been used by the wealthy and fully blessed by the IRS. The difference between some and most are that these wealthy individuals have a tax attorney in their corner or on their team as opposed to someone who’s just running the numbers through software.
Note: For the most part, a CPA’s job is to accurately report what happened throughout the year. A tax attorney’s job is to structure what will happen throughout the year and defend you if the IRS has an issue with it.
What tax strategy looks like
For a high earning W2 employee efficient tax strategy might involve putting as much as you can into a Roth IRA, Strategically timing the exercise of any stock options, Or having an understanding of how the state where you live interacts with federal obligations in situations such as you working remotely or split time working between different states.
If you’re a business owner or self-employed then there are some other things that you need to consider. The choice between operating as a sole proprietor or an S-Corp can potentially have a 5-figure impact on your tax liability. A few more things that can have an impact are how you pay yourself, how you categorize business expenses, Cost segregation on real estate, Qualified opportunity zone investments, or whether you’ve taken advantage of Qualified Business Income (QBI) deductions – also known as §199A deductions.
None of these really require anything out of the ordinary. They just require would someone with extensive tax knowledge who can parse the code and use it in your favor before the year is over.
When does it make sense to bring in a tax attorney?
To be fully transparent, not every tax situation requires legal counsel. Now if any of the following applies to you in any way, it’s probably worth having a conversation with someone who has knowledge beyond what your accountant can offer:
You own a business that makes a whole ton of money. You’ve received an IRS notice or have a suspicion that you might. You have a major financial effect like you Sold something of high value and made a lot of money from it, you inherited something of high value or a lot of money, or you had some type of huge settlement. You’re a high earner who’s never had some type of proactive tax conversation. You’re entering a new tax bracket and want to have a full picture of what will change.
The goal isn’t to replace your CPA. The real goal is to add an extra layer – someone who Thanks about your tax picture like a chess player who sees the entire board and not just the next move.
“The best time to do tax preparation was last year, the next best time is right now while you still have the room to move.”
The bottom line
You’ve worked really hard for everything you’ve earned. And although the tax code is complex, It does contain legal pathways for you to keep more of what you’ve earned. However, those pathways don’t reveal themselves on a 1040 in April. Those pathways reveal themselves in earlier conversations that most people never think to have.
You should probably start thinking about having those conversations a lot sooner.
