Tax Planning / The Compound Effect
You're Paying More in Taxes Than You Think
| 4 min | By Heath J. Harris
For most high-income earners and business owners, taxes are the single largest annual expense -- and you're probably paying more than you have to.
Quick quiz: What is your biggest annual expense? If you said your mortgage, your children's tuition, or even your health insurance -- those are significant. But for most high-income earners and business owners, the real answer is taxes.
Federal income tax, state income tax, capital gains tax, payroll tax, sales tax, property tax -- it adds up relentlessly. And here is the worst part: you are probably paying more than you have to. Not because you are doing anything wrong, but because most people -- and even many financial advisors -- treat taxes as an afterthought rather than a central planning priority.
At Compound Advisory, tax planning is not a side service. It is woven into every recommendation we make, from investment selection to withdrawal sequencing to retirement timing. Because for our clients -- retirees, pre-retirees, and business owners with significant assets -- taxes represent the single biggest controllable drag on long-term wealth.
Hypothetical Case Study: The $280,000 "Oops"
Consider a hypothetical scenario we see far too often. Jon, a business owner, sold his company for just under $5 million. But he did not engage a financial advisor or tax strategist until after the sale was complete. No pre-sale planning. No entity restructuring. No forward-looking strategy. The result? An estimated $280,000 in taxes that could have been reduced or avoided with proper planning.
He missed several key opportunities:
- He did not establish a donor-advised fund before the sale to capture a charitable deduction in the highest-income year
- He did not evaluate whether his company qualified for Qualified Small Business Stock (QSBS) exclusion
- He did not defer a portion of the sale through an installment sale structure
- He did not offset realized gains with harvested losses through tax-loss harvesting
- He did not use the lower-income years following the sale to execute strategic Roth conversions
Every one of these strategies is legal, well-established, and available to most business owners -- but only if the planning starts before the transaction closes. Once the gain is realized, the window shuts.
Smart Tax Moves Most People Miss
You do not need to sell a business to benefit from proactive tax planning. Here are four strategies that apply broadly to high-net-worth individuals, retirees, and anyone managing meaningful assets:
1. Tax-Loss Harvesting
This involves selling investments that have declined in value to offset gains elsewhere in your portfolio. The net effect is a lower tax bill without fundamentally changing your investment strategy. Most investors -- and many advisors -- only think about this in December. At Compound Advisory, we monitor portfolios year-round and harvest losses whenever the opportunity arises. Over time, this discipline can reduce tax drag by thousands of dollars annually.
2. Asset Location
Asset location means putting the right investments in the right accounts. Tax-inefficient assets -- like bonds, REITs, and actively managed funds that generate ordinary income -- belong in tax-deferred accounts like IRAs and 401(k)s. Tax-efficient growth assets -- like index funds and stocks held for long-term capital gains -- belong in taxable brokerage accounts. Smart asset location can meaningfully improve after-tax returns without changing your actual investment allocation at all.
3. Charitable Giving (With a Strategy)
Charitable giving can be a powerful tax tool when it is done intentionally. We help clients use donor-advised funds to "bunch" multiple years of giving into a single high-income year, maximizing the deduction when it matters most. We also help clients gift appreciated stock directly to charity instead of writing a check -- which eliminates the capital gains tax on those shares entirely. For Maryland residents and clients in other states with state income tax, the combined federal and state tax benefit of strategic charitable giving can be substantial.
4. Income Shifting and Roth Conversions
This is especially valuable in the years surrounding retirement or a business sale, when income can fluctuate dramatically. Strategic income shifting can involve converting traditional IRA funds to Roth in low-income years (paying tax at a lower rate now to avoid higher rates later), delaying income recognition into future years when your bracket may be lower, or timing the realization of capital gains to coincide with years of lower overall income.
A well-designed multi-year Roth conversion strategy alone can potentially save a retiree hundreds of thousands of dollars in lifetime taxes. But the analysis is complex -- you need to model the impact on Medicare premiums (IRMAA), Social Security taxation, and future Required Minimum Distributions. This is the kind of planning that requires a dedicated tax-focused approach, not a generic year-end tax review.
Why Your CPA Is Not Enough
CPAs are essential. They prepare your returns, ensure compliance, and keep you out of trouble with the IRS. But most CPAs are focused on last year's taxes -- not next year's strategy. Proactive tax planning is a forward-looking exercise that requires modeling future income, anticipating legislative changes, and coordinating across your investment, retirement, and estate plans.
At Compound Advisory, we work alongside your CPA -- not as a replacement, but as a strategic partner. We handle the forward-looking tax planning and coordinate the execution, while your CPA handles the compliance and filing. When these two roles work together, the results are significantly better than either one working alone.
Pay What You Owe -- Nothing More
We are not in the business of dodging taxes. We are in the business of avoiding unnecessary taxes. There is a real and important difference. Every dollar you overpay to the IRS is a dollar that could have stayed in your portfolio, funded your retirement, or been passed to your family.
At Compound Advisory, based in Annapolis, Maryland and serving clients virtually across all 50 states, we build tax strategy into your financial plan -- not around it. If you suspect you may be paying more than you need to, our complimentary Retirement Clarity Assessment is designed to help you identify the opportunities hiding in your current situation -- and build a plan to capture them.
This is a hypothetical illustration for educational purposes. Individual results will vary. All investing involves risk, including possible loss of principal.