Keep More of What You Earn

Most people only think about taxes once a year, when their CPA hands them a return to sign. By then, the tax bill is already set. Nothing you do in April changes what you owe for the year that just ended.

Real tax planning happens before December 31. It happens when you choose your entity structure, when you decide how much salary to take, when you fund retirement plans, when you buy or sell real estate, when you make charitable contributions. Every one of those decisions has a tax outcome. Most of them are reversible if you catch them in time. Almost none of them are reversible after the year closes.

After 32 years of working in federal tax law, I have seen what separates the business owners who keep more of what they earn from the ones who do not. It is not income level. It is whether they treat tax planning as a year-round discipline or an April panic.

Here is what real tax planning for business owners and high-income individuals actually looks like.

If you elect S-corp taxation, you have to pay yourself a "reasonable" salary as an owner-employee under Internal Revenue Code Section 1366. Too low and the IRS reclassifies your distributions as wages, triggering back payroll tax, penalties, and interest. Too high and you defeat the purpose of the election.

The IRS does not publish specific salary tables for S-corp reasonable compensation. They look at:

A well-structured S-corp owner draws a defensible salary, documents the basis for the salary determination, and takes the rest as distribution. The savings can be substantial. A business netting $200,000 with a $90,000 salary saves approximately $13,500 in self-employment tax compared to taking the full $200,000 as Schedule C income.

The IRS audits S-corp reasonable compensation aggressively. Documentation is everything.

The 2017 Tax Cuts and Jobs Act created the Section 199A deduction, allowing pass-through business owners (sole proprietors, partners, S-corp shareholders, LLC members) to deduct up to 20% of qualified business income.

The mechanics are complex. The deduction has income thresholds (currently around $383,900 for joint filers, around $191,950 for single filers as of 2024, adjusted annually). Above the thresholds, "specified service trade or business" (SSTB) limitations kick in, and the W-2 wages / unadjusted basis in qualified property tests apply.

For owners near the income thresholds, planning specifically to preserve the §199A deduction matters. Strategies include:

For founders and early investors in C-corporations meeting specific requirements, Internal Revenue Code Section 1202 allows exclusion of up to $10 million (or 10x basis, whichever is greater) of gain on the sale of Qualified Small Business Stock (QSBS) held for more than five years.

The requirements are detailed. The corporation must be a domestic C-corporation. Total gross assets at the time of stock issuance must not exceed $50 million. The corporation must be engaged in a qualified trade or business (excluding certain service businesses, real estate, hotels, and similar activities). The stock must have been issued directly by the corporation, not purchased on a secondary market.

For founders considering entity structure at startup, the QSBS opportunity is one of the most significant reasons to consider C-corp despite double taxation drawbacks. The 5-year holding period and complex eligibility rules make this a planning topic that has to be addressed at formation, not after the fact.

Traditional retirement accounts (401(k), traditional IRA) provide upfront tax deductions but require taxable distributions in retirement. Roth accounts work in reverse: no upfront deduction, tax-free distributions in retirement.

Strategic Roth conversions involve voluntarily converting traditional retirement balances to Roth during years when your marginal tax rate is unusually low. Common triggers:

Conversions are taxable in the year converted. The right amount to convert depends on filling up lower tax brackets without triggering higher brackets, the Medicare IRMAA surcharge, or higher capital gains rate thresholds.

For taxpayers age 60-70 with substantial traditional retirement balances, multi-year Roth conversion ladders often save six figures over a retirement lifetime.

Tax planning during life and estate planning at death are deeply connected. Decisions made now affect what happens later.

The federal estate tax exemption is currently around $13.6 million per person ($27.2 million per married couple) as of 2024, scheduled to revert to roughly $7 million per person at the end of 2025 unless Congress acts. Taxpayers with potential estates near or above the post-sunset thresholds have a planning window now.

Coordinating tax planning with estate planning involves:

Most tax professionals are tax preparers. They take last year's transactions and put them on the right forms. That work is necessary but it is not tax planning.

Tax planning is forward-looking. It asks: given what we know about your situation now, what should you do this year and the next five years to minimize total lifetime tax burden while achieving your other financial goals?

A good tax planner works closely with your CPA. A good CPA prepares returns that reflect the planning decisions. They are different roles requiring different skills. Some firms do both. Many do not.

The Law Offices of Darrin T. Mish focuses on tax controversy and tax planning. We do not prepare tax returns. We coordinate with your existing CPA to ensure that the strategies we develop get implemented correctly on the returns they file.