Advanced Tax Planning: Strategies for Building Wealth

You've mastered the basics. Now let's explore strategies that sophisticated investors and high earners use to minimize their lifetime tax burden.

The Tax Planning Mindset

Tax planning isn't about cheating—it's about using the tax code as intended. Congress created these incentives to encourage specific behaviors (saving, investing, homeownership). You're simply accepting the invitation.

The Three Levers

1. Reduce taxable income — Deductions, retirement contributions
2. Shift income timing — Defer to lower-earning years, accelerate deductions
3. Change income character — Convert ordinary income to capital gains

Maximizing Tax-Advantaged Accounts

The Account Priority Stack

Optimize in this order:

The HSA Triple Tax Advantage

HSA is the most tax-advantaged account available:

1. Contributions are tax-deductible
2. Growth is tax-free
3. Withdrawals for medical expenses are tax-free

Pro strategy: Pay medical expenses out-of-pocket, let HSA grow, withdraw tax-free decades later. Keep receipts forever—there's no time limit on reimbursement.

Backdoor Roth IRA

If your income exceeds Roth IRA limits ($161,000 single / $240,000 married in 2024):

1. Contribute $7,000 to a Traditional IRA (non-deductible)
2. Convert to Roth IRA immediately
3. Pay minimal tax on any gains between contribution and conversion

Mega Backdoor Roth

If your 401(k) allows after-tax contributions and in-service withdrawals:

1. Max out pre-tax 401(k) ($23,000)
2. Make after-tax contributions (up to $46,000 more)
3. Convert to Roth 401(k) or roll out to Roth IRA

Result: Up to $69,000/year into Roth accounts vs. the normal $7,000 limit.

Tax-Loss Harvesting

When investments drop in value, you can sell to "harvest" the loss:

How It Works

1. Sell investment at a loss
2. Immediately buy a similar (but not "substantially identical") investment
3. Deduct the loss against gains, or up to $3,000 against ordinary income
4. Carry forward unused losses indefinitely

Example

The Wash Sale Rule

You cannot buy "substantially identical" securities 30 days before or after the sale. Solutions:

• Buy a different but similar ETF
• Wait 31 days (but you're out of the market)
• Double up first, then sell (more complex)

Asset Location Optimization

Where you hold investments matters for taxes:

The General Framework

Why This Matters

• Bonds generate ordinary income (taxed high)
• In Traditional IRA: That income is sheltered until withdrawal
• Stock index funds are tax-efficient (low turnover, qualified dividends)
• In taxable: You pay less in annual taxes

Income Shifting Strategies

Timing Income and Deductions

High income year coming?

• Accelerate deductions into this year
• Defer income to next year if possible
• Max out retirement contributions

Low income year coming?

• Roth conversions at lower tax rates
• Realize capital gains at lower rates
• Take income this year if next year will be higher

Roth Conversion Ladder

For early retirees or those with variable income:

1. In low-income years, convert Traditional IRA to Roth
2. Pay tax at low marginal rate
3. After 5 years, access those funds tax and penalty-free

Example: Convert $50,000/year during early retirement

• Might pay 12% tax ($6,000)
• Avoid 22-32% tax on Required Minimum Distributions later
• Savings: $5,000-$10,000 per year of conversions

Charitable Giving Strategies

Donor-Advised Funds (DAF)

1. Contribute appreciated stock to DAF
2. Take immediate tax deduction at full market value
3. Avoid capital gains tax on appreciation
4. Distribute to charities over time

Example: Stock bought at $10,000, now worth $30,000

• Donate to DAF: $30,000 deduction, no capital gains tax
• Sell and donate cash: $30,000 deduction, but $3,000 in capital gains tax

Bunching Charitable Deductions

If you're near the standard deduction threshold:

• Donate multiple years' worth in one year
• Itemize that year, take standard deduction in others

Example:

• Normally donate $5,000/year
• Instead, donate $15,000 every 3 years
• Years 1 & 2: Standard deduction
• Year 3: Itemize with $15,000 charitable + other deductions

Real Estate Tax Benefits

Primary Residence

• mortgage interest deduction (if itemizing)
• Property tax deduction (up to $10,000 SALT cap)
• Exclude $250,000/$500,000 gain when selling (if lived there 2+ of last 5 years)

Rental Property

• Depreciation deduction (~3.6% of building value annually)
• Expense deductions (repairs, property management, insurance)
• 1031 exchange to defer gains indefinitely

Real Estate Professional Status

If you qualify (750+ hours and majority of work time in real estate):

• Rental losses offset ordinary income with no limit
• Significant benefit for high earners with real estate investments

Equity Compensation Optimization

RSUs (Restricted Stock Units)

• Taxed as ordinary income when they vest
• Sell immediately to diversify? Or hold for long-term capital gains treatment on future appreciation?
• Consider selling and investing in index funds for better diversification

Stock Options

ISOs (Incentive Stock Options):

• No tax when exercised (but AMT may apply)
• Long-term capital gains if held 1+ year after exercise, 2+ years after grant
• Complex planning required

NSOs (Non-Qualified Stock Options):

• Taxed as ordinary income at exercise
• Often exercise and sell same-day
• Less planning flexibility

ESPP (Employee Stock Purchase Plan)

• Usually 15% discount on stock purchase
• Holding period determines tax treatment
• Often beneficial to sell immediately and reinvest

Putting It All Together

A comprehensive tax strategy might include:

1. Max all tax-advantaged accounts — 401(k), HSA, Backdoor Roth
2. Optimize asset location — Right investments in right accounts
3. Harvest losses annually — Especially in December
4. Time Roth conversions — During low-income years
5. Bunch deductions — Charitable giving, medical expenses
6. Hold appreciated stock long-term — For lower capital gains rates
7. Use appreciated stock for charitable giving — Avoid gains entirely

Annual Tax Planning Calendar

When to Hire a Tax Professional

At this level, professional guidance often pays for itself:

• CPAs who specialize in high-income individuals
• Tax attorneys for complex situations
• Financial planners with tax expertise (CFP + CPA ideal)

Cost: $500-$5,000+ annually Savings: Often 5-10x the cost in optimized strategies