4 Questions That Define Your Tax Planning Strategy

Fifth Third Bank


While most high earners are understandably eager to minimize their tax liability, it’s nearly impossible to lower your tax bill without advance planning and a strategy that takes the nuances of your individual financial situation into account.

“Because planning for taxes is time sensitive, it’s best to start early rather than waiting until the end of the year,” says Melissa Register, senior wealth strategist at Mirador Family Wealth Advisors, a division of Fifth Third Bank. “It’s also important to have a cohesive plan in place. Though circumstances might change throughout the year, you have to be proactive to achieve the best possible tax benefits.”

To help you begin thinking about your taxes in a more comprehensive, holistic way, consider these four essential questions:

1. Are you compensated with stock options?

“Stock options are among the most complex tax issues that high net worth individuals deal with,” Register says. If your employer pays you with stock options, it is important to realize you will likely incur tax liability when exercising those options. Choosing the right time, then, can prove to be of great consequence.

There are many types of stock option plans—ISOs, RSUs, NQSOs—and each involve a different set of tax rules. It’s crucial to understand what type of options you have, what the vesting schedule is and the tax issues that fit your situation. A well-qualified financial advisor should be able to educate you about your particular options and help you determine the best time to exercise them.

2. When is the right time to sell investments?

Most investors understand that, although intended to earn income, investments are also important vehicles for minimizing tax liability. If you’ve had a particularly high-income year, it may be a good idea to sell some investments at a loss to offset those gains.

Most advisors will work to help you balance your portfolio during the fourth quarter of the year. “We usually meet with clients to evaluate their portfolios in September or October, and at that point, the client usually also has a good idea of their other tax liabilities for the year, so it’s a good time to discuss whether you need to sell some investments to offset gains,” Register says.

3. Are you planning to sell a family business?

The sale of a business can generate significant tax implications, but there are various options for how to structure a sale, some of which could help you minimize tax liability. For instance, if you own a C corporation, you might consider starting an employee stock ownership plan (ESOP) to roll the proceeds from your business sale into it, thereby allowing you to defer tax payments.

Because there are many different possible structures for a business sale, it’s a good idea to involve your financial and tax advisors in the early stages. “If you’re planning to sell a business, don’t wait until the last minute to bring your advisors into the loop,” Register says. “Many times, people wait until after they’ve signed a letter of intent to ask us about the tax ramifications. Often, if we’d been involved earlier, we could have helped design the sale in a more favorable way for taxes.”

Register recommends talking to your advisors at least one year to 18 months in advance of the sale. That way, they can help you brainstorm potential deal structures that can help you both take advantage of potential tax breaks and determine the specific dollar amount you need to walk away with in order to maintain your future financial needs.

4. How can you maximize charitable gifts for tax purposes?

Charitable gifts can often help lower your taxable income. In some cases, however, those donations can be used in an even more strategic way. Perhaps, for example, you’ve reached an age at which you are required to take distributions from your retirement accounts. If you don’t need those distributions for living expenses, you can take advantage of Qualified Charitable Distributions. This IRS rule allows you to give a portion of each retirement account distribution to a charity of your choice for a better tax outcome.

Wealth planners at Fifth Third have conversations with their clients throughout the year to discuss these and other questions that may affect their tax liability, and work to develop plans to minimize their tax bills. Learn more about how Fifth Third can help you minimize your tax burn