There’s an old adage, “It’s not what you make, it’s what you keep.”
Tax filing season serves as an annual reminder of this concept. If you make $2 million but have to pay 50% to Uncle Sam and your state, it doesn’t feel like you’ve actually made $2 million, does it?
That’s why I would submit an amended version of the adage: “It’s not what you make. It’s how you make it.”
So much tax planning revolves around structuring your income specifically with your tax strategy in mind. I’ll use an example I frequently encounter in real estate investing, particularly around how investments are taxed.
If you earn more than $1M per year, you’re commonly paying about 50% of your income in taxes. From a tax perspective, it may make less sense to invest in something that generates purely taxable income. Returns are less exciting when you only keep half of what’s coming in. An appreciating investment taxed as capital gains may be the better net investment.
On the other hand, if someone has just retired or doesn’t show high income on paper, income-generating assets can be very productive since their tax liability is significantly lower.
Different tax circumstances call for different solutions, and understanding how to align investments with tax efficiency is critical for maximizing returns.
This is a perfect example of the difference a fully integrated financial plan makes. We don’t want to wait until tax filing to “find out” you should have structured your income differently. We want our clients to keep as much of what they’ve earned as possible.
Fully integrating your financial strategy is the way to do it.
