Strategies for Navigating a High-Income Year

For entrepreneurs and executives, a high-income year—whether from a capital event like selling a business or a large bonus—brings both opportunities and challenges.

Managing the tax implications of a substantial income is no small feat. Our latest video offers smart strategies to help you balance taxes, investments, and long-term goals.

In this video, you’ll learn about:

  • The key difference between income from a capital event and a bonus year
  • Smart approaches to handling equity compensation, charitable giving, and investments
  • How to prioritize sound investments without letting taxes drive your decisions

Take the next step in understanding how to align your wealth strategy with your goals.

Transcript

Hi, I’m Lynn Evans, Tax Advisor and Director of Family Office Services at Solidarity Wealth. If you’re looking forward to an extraordinary income year, congratulations! Let’s take a closer look at what that could mean.

Capital Event vs. Large Bonus Year: Why the Difference Matters

Income from a capital event, like selling a business, is fundamentally different from a large bonus year or other forms of high income. Why does this distinction matter? A capital event requires long-term strategic planning and often involves navigating complex areas within partnership or corporate taxation. It also frequently involves estate and trust planning. A capital event may also require a review of and strategic planning around equity compensation and may have varied tax treatment.

Planning for a substantial bonus or similar income focuses more on immediate tax optimization and managing cash flow effectively. Every financial situation is unique. That’s why tailored strategies are so important.

Building the Right Tax Planning Team

Today, I’ll share a few key insights for entrepreneurs and executives to approach tax thoughtfully and preserve more of your hard-earned wealth. First things first, whenever possible, you should start your planning well in advance of a large income event. The earlier you start planning, the more flexibility you have to reduce taxes and meet your personal and family goals.

It’s critical to have a synchronized advisory team involved in your planning that includes a tax attorney, a CPA, and a wealth advisor. Each member of your team should prioritize strategies that align with your goals. In Solidarity Wealth, we coordinate this process for our clients.

Equity Compensation Tax Strategies

Once you have your team in place, it’s time to start strategizing. If part of your income comes from equity compensation, understanding its tax treatment is critical. You’re likely familiar with the alphabet soup of equity compensation, ISOs, non-QOLs, RSUs, profits, interest, the list is exhaustive.

Each of these vehicles is treated differently for tax purposes, and each can result in tax at different times. It can be easy to be caught off guard by unexpected taxes. However, managing these options correctly can facilitate significant tax savings.

Strategies like exercising options early or spreading transactions across years instead of all at once can help mitigate income tax as well as alternative minimum tax or AMT. Another powerful strategy for some equity options is the 83B election. Don’t forget this one. It’s a great tool for locking in a lower tax rate upfront.

Qualified Small Business Stock (QSBS) Benefits

The next tip for mitigating taxes in a capital transaction is taking advantage of qualified small business stock treatment. If you’re an executive or founder of a qualifying small business, up to $10 million or more of your capital gains could be excluded from taxes.

Because this strategy requires specific planning and timing, it’s essential to verify that your QSBS shares qualify for the exemption. To learn more about QSBS, our CEO Jeff McClain recorded a great video that you can view on our website under insights.

Tax-Optimized Charitable Giving Strategies

Optimizing charitable giving is another smart way to mitigate your tax liability. This strategy lets you accomplish two goals. Not only can you lower your tax bill, but you can also further your personal values. For example, tools like donor-advised funds or charitable remainder trusts help to support a meaningful cause and can also significantly reduce taxable income.

If you contribute assets that have already appreciated in value, this strategy becomes even more effective. This next approach lets you strategically defer your income while simultaneously accelerating deductions. Here are two examples, prepaying your mortgage interest or making deductible business investments.

Those can make a big difference in how large your tax bill is if you take action before the end of the year. The last tip I want to share for mitigating taxes is investing in tax-advantaged vehicles. Certain investments may provide favorable tax treatments and in some cases may even allow you to offset income from other sources.

But remember, investments should always make sense from an overall financial and investment perspective. Don’t let the tax tail wag the dog. A tax benefit is valuable, but it should never override sound investment principles.

Be cautious about certain tax-focused strategies, especially what we like to call a TikTok tax advice. Some are currently under IRS scrutiny, even though they continue to be marketed as solutions for high tax burdens. Examples of these include the use of syndicated conservation easements and captive insurance arrangements.

Planning for Tax Payments in High-Income Years

Finally, regardless of what strategies you use, in large income years there will likely be some tax liability. It is important to plan for these payments so you’re not caught by surprise when the bill comes due. Proper planning can help to avoid potential penalties and may also generate some investment return on amounts set aside for tax payments.

Managing taxes during a big income year does not have to be overwhelming. Work with a team that prioritizes both tax efficiency and sound financial strategy. At Solidarity Wealth, we focus on balancing liquidity, growth, and tax planning while keeping long-term financial health at the forefront.

Would you like to learn more about how Solidarity Wealth can help? Reach out to us by calling 385-374-1665.

Lynn Evans

Lynn Evans

Tax Advisor | Director, Family Office Services

(385) 374-1665

lynn@solidaritywealth.com