56% of you are lawless degenerates 🧟 - opting for the "give me all the above" content on last weeks poll.

But I'm here for it. It fits in with the below graphic that pretty well sums up what I'm about: my mission is to lower the cost of capital for business owners, investors, and advisors through accounting, tax, and planning.

So this week, we're going to talk about a concept I've been cooking on for a little while: how to capture 80% of good tax strategies and plot them out chronologically over a lifetime. 👶🪦

The Tax Life Plan is kind of like a what to expect when you're expecting (to owe tax). Let's dig in:

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A Taxpayers Journey through Life

If you were to plot out the average high-ish net worth individuals journey through tax brackets in life it would look something like this:

It's not linear - which creates massive opportunity for arbitrage (as we learned last week in the 7 Foundations of Tax Strategies).

Likewise, the average high-ish net worth taxpayers liquid assets also don't grow linearly - we know this because presumably those assets get added to (and taken from) from the income in higher tax years above. 🌳

Using this framework of assumptions of tax rates and asset levels throughout life, we can toss out a few good ideas in each major stage of life.

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Early Career

From a pure rate arbitrage perspective, maxing out your 401(k) at what will likely be your lowest tax years isn't the most strategic play. Instead, some key tax strategies for early career mirror those that would be for comparatively lower income tax years in later stages:

• Roth IRAs - pay tax at lower tax rates, start compounding sooner
• 401(k) Up to the Max Match - if your employer matches, don't leave that compensation on the table
• Expense Minimization - create liquid wealth of 6-12 months of living expenses as your emergency fund

That's it. At this point, most early high net worth-ers (HNWs) are working a W2 job and saving money. 🏦

With next to nothing in real and tangible net worth, creating trusts, LLCs, etc. are a distraction.

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Mid Career

Here are where paths diverge: real wealth gets created by (1) doubling down into W2 life and climbing the corporate ladder, or (2) staring your own business. The separate paths have different strategies, but there are some common strategies for this stage:

• Early Trust and Estate Planning - as you build some assets, having a living trust will make probate easier in case of your passing ⚰️
• Life and Umbrella Insurance - your wealth isn't where you need it to be for your family to live without you comfortably, so use term life insurance and good umbrella insurance (more than just from your job)
• Get a Spouse in Real Estate - okay, kind of joking. But this is a seriously underrated tax strategy for high W2 and business income earners
• Charitable Giving - Donor Advised Funds (DAFs) - these are great ways to control giving and get a tax-free "step-up" in donated stocks if you follow the rules. If you're charitably-inclined, have one of these rolling for a life-time of giving options 🤲

Mid to Mature -Career - Employee

Having chosen to double down into climbing the corporate ladder, at this stage the taxpayer begins to accumulate wealth. 📈 So income tax deferral and income character change strategies come into play:

• 401(k) Max - as you approach the 30% brackets, which are likely higher than you'll be during retirement, it makes sense to max out your 401(k) contribution even beyond the employer match
• Traditional IRA - even non-deductible IRAs are great because the growth happens tax-deferred
• Roth IRAs and Backdoor Roths - for lower income years compared the recent average. These are great ways to accelerate income recognition while taking advantage of retirement planning opportunities.
• 83(b) Elections - this is the employee's carried interest loophole. ➰ If granted stock options, it usually makes sense to pursue this election that includes in income the value of the stock at the current valuation - leaving the later appreciation subject to capital gains. Otherwise, the full appreciated value at time of vest would be taxable at ordinary rates.

Mid-Career - Start-Up Business

Compared to the employee-track, usually building a start-up means compounding non-liquid wealth inside the business - in other words, being poor AF for a few years. 🏚️ So here, what matters most is simplicity and access to losses.

• Schedule C - don't overcomplicate it at start-up. You don't need 8 S-Corps and LLCs before you have cash flow. If you don't have investors lined up ready to write checks, then don't lock yourself into a complex structure.
• Business Bank Account - that's it. That's the tax advice. Don't commingle business and personal.

Mature Career - Business

The employee's tax strategies don't really evolve like the business owners do. 🎢 They're still banking on the tax rate arbitrage and some early trust and estate planning. Maybe their spouse is a real estate agent and they get into real estate ownership. But the average employee taxpayer's life shouldn't get much more complex than that.

Not so with business owners. Here are the common strategies we see in this phase:

• Entity Selection -
  • Partnerships for appreciating assets and debt
  • S-Corps for fee-type income streams with simple ownership
  • C-Corps for technology, international investor blockers, and going after big investors
• S-Corp Management Company 👔 - compliment a mix of the above inputs with a (legitimate) management company to get the best of both worlds of a partnership and S-Corp
• §469 Aggregation Election - combine income and losses from different "activities" when eligible. This unlocks the magic of real estate but also applies to business owners who own different businesses.
• 5&5 Built-in-Gain Avoidance - Looking at an asset sale but want to compound growth at a lower tax rate? Consider being a C-Corp for 5 years (lower tax rates than personal), converting to an S-Corp and waiting for 5 years before selling to let the built-in-gains burn off. Voila - best of both worlds.
• QBI Optimization - add salaries to yourself to increase your QBI deduction. Partnership structures complicate this, but with some entity structuring, it's very possible still.
• Operating Agreement Review 🔍 - do you know if your operating agreement agrees to your pitch deck? And if the tax return is prepared in accordance with both? This can blow up in a lot of ways if not monitored - IRS audits, LPs getting angry and digging around
• Real Estate Professional Status 🏢 - if your small business is real estate adjacent, you may be eligible for this classification. And this can unlock a lot of opportunity to defer tax strategically with related real estate investments.
• Cost Segregation and Reverse Cost Segregation - you've likely heard about cost segregation, which is an engineered study on the components of the building to accelerate depreciation. But you can do it in reverse too when you sell, which can help avoid serious recapture depreciation.
• Step-up in Basis 🚶‍♂️ - the magic of Partnerships. When ownership in a partnership changes hands, the new owners (or remaining partners) may be eligible for additional special depreciation deductions. This can add meaningful post-tax ROI.
• Bramblett Transactions - this is very real estate niche. But land developers or home builders may be eligible for this treatment that can convert much of the appreciation in land to capital gain versus all ordinary rate income.
• TICs and 1031s - this is the 401(k) plan for real estate pros. Deferring gain on appreciated property let's it compound continually (assuming the market cooperates). But if the deal is syndicated, it can get tricky - which is where TICs come in. If you don't know what a TIC is, I wrote about them some weeks back.
• QSBS - tech start-ups love the Qualified Small Business Stock play. It can save millions in tax when it all works - C-Corp, eligible industry, asset value limitations, but tax-free gains.

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Late Career

At this point in the taxpayers life, income levels have peaked or are peaking. Wealth building is happening at the highest rate and retirement is coming in the next 5-10 years. Because of the imminent drop in tax rates during retirement years, more estate and charity decisions are made. Note that trusts and estates are complex and should be handled by unique niche experts - of which I am not one. 🙅‍♂️

But what's worth commenting on is that if you give too much of your wealth away in estate planning or charitable giving early on, you may have a lot of pain unwinding it all if you later need that capital. 😵‍💫 That's why waiting a little longer until you're confident in what you need to live on and will give is critical to do.

Here are some of the strategies for this stage:

• Revocable and Irrevocable Trusts - a balance between control, protection, and estate tax mitigation. You want to contribute assets that are lower in value to your estate so you can use more of your lifetime exemption. This is why during lulls in the market or cycles, gifting can be a powerful tax tool.
• Charitable Remainder Trusts - CRTs (lot of variation here) are helpful to accelerate a charitable deduction in a high income tax year. You see these used in exit years or large uncommon gains to match high deductions with high income. 👉 👈
• Charitable Contributions of Stock - commonly done in combination with a DAF (see above), this can help avoid tax on gains in equities while still getting maximum charitable donations for their value.
• Succession Planning - knowing who will run your business next is critical. If you're looking at an exit in the future, many taxpayers will carve out some portion of equity of the business to be owned by trusts - capturing the lower value at time of "gift." To boot, while unique, S-Corps aren't out of the question for having some trusts own part of the outstanding shares.

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Retirement

Made it. After a lifetime of working, time to enjoy life. But retirement holds it's own little tax surprises for the unwary. Here are few strategies to stay in the game even later in life.

• Portability ⚱️ - death happens. But this painful life change can be compounded by not making a portability election. This is a tax election that allows a surviving spouse to attribute to them their deceased spouses unused lifetime exemption. That means possibly millions of dollars in more lifetime estate gifting.
• Irrevocable Life Insurance Trusts (ILITs) 👀 - these are tools to basically get insurance proceeds outside of the taxable estate. Given, these should be set up earlier on (perhaps pre-retirement), but they can be power ways to help finance an estate tax liability.
• Required Minimum Distribution (RMD) Planning 👨‍🦳 - once you reach 73, you have to take annual distributions from your retirement accounts. But many times taxpayers don't need the money - creating a tension of tax on money you didn't need to live. Things like the Qualified Charitable Distribution can help reduce that hit to taxable income while still providing a charitable deduction (talk to a pro).

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There's only so much about tax strategy that is independent - so many of these decisions are opportunistic and take careful consideration. But it's worth plotting it out on a longer time horizon like this to see when you should usually think about these things.

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