Lifetime Tax Planning: It’s Not About This Year; It’s About Every Year
In our latest video, Daniel Andersen, CFP®, and Trevor Stone, CFP®, EA, wealth advisors at Parkshore Wealth Management, tackle a question that can shape how you approach taxes: Is the goal to pay the lowest tax bill possible right now or the lowest tax bill over your lifetime? Watch the video below, or keep reading for the highlights.
Almost everyone wants to pay less tax, and there is nothing wrong with that instinct. Where it can go astray is when the focus narrows to a single year. Getting this year's tax bill as low as possible can feel like a win, but if it means paying more in future years or a higher average tax rate over time, you have not actually come out ahead.
Daniel and Trevor frame it as smoothing a curve rather than chasing a low point. Instead of a tax bill that swings sharply from one year to the next, the goal is a more level rate across years, and ideally across generations, since a surviving spouse or the family members who eventually inherit your assets share in the outcome, too. That can mean accepting a somewhat higher tax bill in a given year, through a Roth conversion or another strategy, because the multi-year result turns out to be better for you.
The Business Owner's October Impulse
Daniel and Trevor point to a familiar pattern among business owners: Fall arrives, tax season looms, and the impulse is to spend money on new equipment or other write-offs just to avoid paying tax. The math rarely favors that impulse. Paying 22 cents in tax on a dollar and keeping the remaining 78 cents generally beats spending the whole dollar just to avoid the tax.
A more efficient route for many business owners is a retirement plan contribution. It reduces taxable income the same way a purchase does, but instead of an asset that depreciates, the investment has the opportunity to grow toward retirement.
Roth Conversions: Choosing to Pay Tax Now
A Roth conversion means moving money from a traditional retirement account into a Roth account and paying the tax on that amount now, by choice. For the person converting, the appeal is bracket arbitrage: paying tax at, say, a 12% rate today to avoid paying it at 22% or 24% later.
A Roth conversion is not automatically the right move, though. It creates taxable income in the year it happens, and whether it makes sense depends on your current bracket, your expected bracket down the road, and the rest of your financial picture. This can be a decision worth making with a financial advisor or tax professional.
Looking Beyond Your Own Return
A Roth conversion can also matter for the generation that inherits your assets. If you expect to be in a lower tax bracket than your loved ones will be after they inherit, converting during your lifetime lets you pay tax at your lower rate rather than passing that liability on to be paid at theirs. Viewed as a family decision rather than an individual one, that can lower the total tax paid across generations.
The reverse can also be true. If your heirs are young, early in their careers, or otherwise likely to be in a lower bracket than you, it may make more sense to leave the account as is and let them pay the tax. Working with a fiduciary financial advisor can help you determine the best course for you and your family.
Turning Annual Giving Into a Bigger Deduction
For families who give to the same nonprofit or church every year, there is a way to structure that giving for a larger tax benefit: a donor-advised fund. Rather than giving, say, $10,000 a year, you could contribute several years of planned giving, ideally in appreciated stock, into the fund in a single year. You receive the deduction for the full amount that year, then continue distributing it to your chosen causes over the following years, even though there is no additional deduction in those later years.
This approach, sometimes called deduction bunching, can be especially useful for households that typically take the standard deduction rather than itemizing. By bunching several years of giving into one, a family can clear the standard deduction threshold and capture a benefit they would otherwise miss. Compressing income in that same year can also open the door to layering in a Roth conversion while in a lower bracket.
Naming a Charity as Your IRA Beneficiary
There is also a way to reduce the family's lifetime tax bill without an upfront deduction: naming a charity as the beneficiary, or partial beneficiary, of your IRA. Traditional IRA dollars are taxable to whoever inherits them, but a charity does not pay income tax on that money. Directing the most tax-burdened assets to charity, while leaving assets that receive a step-up in basis to your family, can reduce the total tax bill across the estate.
Start With the Long View
Whether it is a retirement plan contribution, a Roth conversion, a donor-advised fund, or a beneficiary designation, each of these strategies asks the same underlying question: What does the lowest tax bill look like over your lifetime, and your family's, rather than just this year? That is the lens Daniel and Trevor bring to the lifetime tax planning question.
If you would like help thinking through your own multi-year or multi-generational tax strategy, we invite you to schedule a conversation with an advisor at Parkshore Wealth Management.
This material was written in collaboration with artificial intelligence (Claude) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.
Parkshore Wealth Management is an independent, fee-only Registered Investment Advisor with offices in Granite Bay and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Daniel Andersen, CFP®, a member of NAPFA, the country's leading professional association of fee-only financial advisors.