What Tax Day Won’t Teach You

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What Tax Day Won’t Teach You

As you can imagine, the last few weeks in our office have been something of a scramble. Last-minute client work, coordinating with CPA offices, ensuring money is in place for tax distributions. As prepared as we are, as our clients are, as their accountants are, it is always the same. Every year without fail.

I am in the process of writing a book. More on that sometime down the road. But I recently finished a chapter on exit planning for business owners, and I used the illustration of climbing a mountain. The common wisdom is that getting up is the hard part, or the point of climbing. It is, in some parts. But here is a picture of a man in the Himalayas, on his way up, or is he.

Whenever we see a picture of someone doing something like this, our brains are wired to think “they must be going up,” I can honestly say I’ve never seen a picture of a climber and assumed they were going down.

But who cares if you get to the top if you can’t safely get down. The summit is the point. But getting down safely is the goal.

Taxes work the same way.

Filing your taxes is the summit. You hand over the documents, pay what you owe, set up your quarterlies, and move on. CPAs take a big sigh. The world moves on. Most people file their taxes away, literally and figuratively, until next April.

But the descent, what happens to your tax strategy for the rest of the year and over the decades ahead, is where the real risk lives. And where the real opportunity lives.

That is what this edition is about. Not the deadline. The work that starts the moment it passes.

A lot has been written about taxes since the Big Beautiful Bill passed last summer. But rather than rehash what has already been covered, I want to show you something practical: how tax efficiency actually works.

Tax efficiency is how you structure your investments to pay the least amount of tax legally required, compared to other methods that achieve the same goal.

Great tax planning opportunities do not show up at your doorstep every day. And like great investments, the rewards compound over time, giving you more freedom to do what you want later in life.

To understand this better, let’s look at how your tax life evolves as you move toward retirement.

At some point, your financial life splits into two different tax worlds: the W2 Side and the Capital Gains Side.

The W2 side is straightforward. It reflects the taxes you pay on your income from work, the world of federal income tax brackets.

As your assets grow, the Capital Gains side begins to take over. Think dividends from stocks and ETFs, long-term capital gains, and interest income.

In retirement, this Capital Gains side becomes your tax life. Two reasons:

1. You no longer have employment income.

2. Your assets now produce the income you live on.

That shift happens quietly at first. The divergence is small, but over time your investments become your entire tax life.

When you miss opportunities to structure your assets more efficiently, you end up with less money. More precisely, you send bigger checks to the IRS instead of booking flights to see your grandkids.

If you miss this transition and reach 75 with a $3 million IRA, wishing it were split into a $1 million brokerage account, a $1.5 million IRA, and a $500,000 Roth, there is not much you can do. The only way forward at that point is to pay a lot of tax to get to a better spot.

Let’s keep going.

 I rarely see this clearly laid out.

Before I get into the three different levels of tax planning, I want to show you where tax planning opportunities come from.

You are always at the center of your financial life. You are your biggest asset and, at times, your biggest liability. It pays to know where to look for opportunities.

Here are some examples:

Your Personal Situation. Selling a business, facing large medical expenses, or receiving an inheritance.

The Market. When markets move sharply up or down, they can create opportunities for positive tax changes.

Legislation. As we saw with the rush of estate planning over the past year, new laws and uncertainty around the tax code often drive major planning activity.

All three forces will continue to shape your tax life. When legislation creates major opportunities, the market often amplifies them, and your personal situation determines how you can act.

Now let’s talk about the three different levels of tax planning.

Level 1 is where most people operate. It includes optimizing documents for your CPA, reviewing year-end deductions, and making salary deferrals. These are helpful, but reactive. If you stay at Level 1, you will miss out on the ocean of opportunity the IRS has laid out for you.

Level 2 digs deeper into how you are taxed. It includes tax-efficient investing, backdoor Roths, HSAs, and Roth conversions. This level is about optimizing what you already have, balancing both the short and long term, and moving assets into the right accounts to compound your tax efficiency.

Level 3 is where the rare, strategic moves happen. The ones that shape your entire financial foundation. Starting or selling a business, retiring, inheriting wealth, or experiencing a major life event that opens a unique window.

Here is a hypothetical that illustrates it well. Say a business owner is planning to sell in about ten years. The business might be worth somewhere in the $3 to $5 million range. They currently live in a state with a 7% income tax. What if, a decade before the sale, their advisor started mapping out a plan to establish residency in a state with no income tax? Not an overnight move. A deliberate, planned transition built around a life that increasingly does not require them to be in one place.

On a $4 million sale, the state tax difference alone is roughly $280,000. Left untouched for 20 years, growing at 7%, that $280,000 passes to the next generation as over $1,000,000. The move that generated a million dollars of family wealth required one conversation, held twenty years earlier.

That is what Level 3 looks like. And that is where the money is made.

Most people understand Level 1 almost by default. But you only reach a better balance sheet later in life if you and your advisors go deeper into Level 2, and do not miss Level 3 opportunities when they arise.

 “Cool, Tom, this sounds great, but I’m 62. Seems like the ship has passed.”

Not exactly. The sources of tax efficiency come from three places: the market, legislation, and personal circumstances.

If you are in your 60s or 70s, there are simply more life events in the rearview mirror you cannot change. But as your assets grow, there are still plenty of opportunities to increase your tax efficiency.

I was recently in my attorney’s office with my wife, updating our estate plans. While meeting with Kyle, I found myself exploring that Level 3 foundation in conversation. How to fold my kids into our financial life. How to benefit them with the way we have structured our business and investments. How to do it all in a tax-efficient way.

I am a long way from having an estate tax problem. My kids are all under six. But I know that conversations with my personal team of advisors now can create a huge impact later, on my family, in our community, and in the causes we care about.

And yes, it also means less tax revenue to the government. In a completely legal way.

Nothing major came out of that meeting, but I walked away with a clearer picture of what I can do and what I should do in the years ahead. My team and I are now working on a plan to get me closer and more prepared for when significant Level 3 opportunities show themselves.

It is my job to look for opportunities and dream out loud with our personal team about what I want to happen. It is their job to help make that a reality.

How did I get here? My attorney asked us to come in and update our estate plan. I listened, and we are better off because of it.

Simple as that.

Building a better version of your financial life takes time and intentionality, and saying yes to people who exist to help you. It is about doing the basics well before you pull the trigger and retire.

Everyone celebrates reaching the summit. The best climbers are already thinking about the descent.

Tom

If you’d like to talk through how this applies to your own financial life, you can learn more about our work at Fjell Capital here.

And if you found this edition useful, let me in the poll below or reply with a quick note—I read every response.

More next week.