What I want to offer in this article is a conversation about how to think about reducing your taxes and creating family wealth with that savings. The fact of the matter is that nobody enjoys paying taxes and we would all appreciate a zero-tax bill. I have over thirty years of experience as CPA (Certified Public Accountant), specifically in tax reduction.  

     A bit of background that will help you to understand how to think about tax planning. When I first started my career out of college, I worked for an accounting firm that thought proactively about taxes. After four years I joined the KPMG, which is one of the “big 4” accounting firms. While at KPMG I was lucky enough to be in the tax consulting business. In that specific group we had a list, or binder, of different strategies that we could implement at Fortune 500 companies. These clients were companies that were publicly traded. Through our tax consulting we would model how different strategies would reduce the tax burden of the company and the impact it would have on the stock price of the company.   

     All publicly traded companies have audited financial statements. Within those financial statements is a footnote disclosure that explains the company’s effective tax rate. Our goal through the tax consulting engagements was to drive that effective tax rate down. From a publicly traded company perspective, when the tax rate is driven down the profit goes up, the value of the business goes up and the stock price goes up. This is all mechanical.  

How Can This Help You?

     With the background of how this works with a publicly traded company, the same thought process can hold true for family-owned businesses and their owners. The difference is that instead of stock price going up, the tax savings translates into additional family wealth. The family becomes wealthier due to the tax savings being invested to grow the business or in alternatives such as real estate, stocks, and bonds.  

     Without getting too far into the woods, let us talk about two definitions. First, the effective tax rate is the taxable income divided by the total tax bill. Second, the statutory rate is the tax rate paid on the next dollar of earnings. These are different amounts because our taxing systems have graduated tax rates. Meaning that lower levels of income pay tax at a lower rate and higher levels of income pay tax at a higher rate. The effective tax rate is simply your average rate. The statutory rate would be the “tax bracket” that you are in.  

     Now that the definitions are out of the way let us discuss tax strategies. There are many kinds of tax strategies but there is not a single legal strategy that will provide you with an ongoing zero-tax bill. If someone tells you that, you need to be very weary. Depending on your circumstances there are strategies that could give you a zero-tax bill in a specific year. Although this is not likely. The more likely scenario is that we find a multitude of strategies that combined will reduce your effective tax rate 5% to 15% on a consistent basis.   


At this point an example may be helpful to demonstrate the points. The following may be a typical fact pattern that we would see:  

  • Business owner and spouse are both aged 48. 
  • Business owner with an S-Corporation that is showing $600,000 per year in taxable profits.  
  • The business is in manufacturing, and they are continually investing in new processes/procedures to be competitive in the marketplace.  
  • They feel that the taxes on the business being paid by them personally are too high.  
  • Wages from the business of $300,000 per year.  
  • Owns residential rental property that generates $10,000 per year in profit.  
  • They need to save for retirement. They have a 401(k) but have not looked at it closely in several years and are not maximizing the benefit.  
  • They have saved $1.200,000 in the stock market with a cost basis of $700,000.  
  • They have a high-deductible health plan, are in good health, and pay for medical expenses out of pocket approximating $4.000 per year.  
  • They can comfortably live on their $300,000 per year in salary.  
  • They want to buy a building for the business to operate in and have the down payment saved in the business bank account.  
  • They want to contribute more to charity and the husband and wife are involved in a non-profit.  
  • If they invest their tax savings in the market they can earn an average of 6% annually from age 48 to 65 when they retire.  


     Given the facts and circumstances of our typical fact pattern the annual Federal income tax bill without any planning would be $241,000. The following table shows the strategies that we may use and the savings on an annual basis at the bottom:  

Strategy   No Plan   Year 1   Year 2   Year 3   Year 4   Year 5  
Max 401(k)      $12,000   $12,000   $12,000   $12,000   $12,000  
Contribute to HSA (Health Savings Account)      $7,000   $7,000   $7,000   $7,000   $7,000  
Contribute appreciated stock to charity      $50,000   $50,000   $50,000   $50,000   $50,000  
Elect Pass-through entity tax treatment for state taxes      $55,800   $55,800   $55,800   $55,800   $55,800  
Purchase Building for business      $320,000   $80,000   ($11,000)   ($11,000)   ($11,000)  
Closely held insurance company            $250,000   $250,000   $250,000  
R&D (RESEARCH & DEVELOPMENT) Tax Credit      $40,000   $40,000   $40,000   $40,000   $40,000  
Total taxes   $240,625   $55,148   $139,184   $83,533   $83,533   $101,575  
Tax savings      $185,477   $101,441   $157,092   $157,092  $139,050  
Effective Tax Rate   26.4%   6.1%   15.3%   9.2%   9.2%   11.2%  
Wealth Generated on Tax Savings    $529,415  $273,115  $399,007  $376,422  $321,395 


Breakdown on Tax Savings

In reviewing the calculations above, the tax savings over the five years is $740,152.  When invested at 6% between their current age of 48 and their retirement age of 65 they generated a total of $1,899,354.  Now we will breakdown the tools that we used to create this wealth:


  • The first strategy that we employ is quarterly tax planning meetings. This ensures that the selected strategies are timely and properly implemented. 
  • The couple had a 401(k) but were not making the maximum contributions. We had them max out the plan which allowed an additional $12,000 per year contribution and helped them save for their retirement goals. This also saved approximately $3,200 per year in taxes.  
  • They were in a high deductible health plan which allows them to use pre-tax dollars in an HSA account to pay medical expenses. Implementing this strategy had them set aside $7,000 per year pre-tax to pay medical expenses and saved approximately $1,850 per year in taxes. Click here for our blog post on the value created by an HSA account. 
  • They said that they wanted to contribute more to charitable organizations that they were involved in. In this case we had them contribute $50,000 per year in appreciated stock. In this case the stock had a fair market value of $50,000 and they had only paid $34,000 for it. They received a $50,000 tax deduction that only cost $34,000 in stock that was already in an investment account. This saved them about $13,200 annually.  
  • As it related to the California taxes due on their S-Corp earnings, we had them elect to pay the taxes at the corporate level which saved them an additional $14,700 per year.  
  • They went ahead and purchased the building for the business. We were able to use a cost segregation tax strategy which saved them $97,000 over the five years.  
  • In the third year they set up a closely held insurance company for the business. This allowed them to save an additional $66,000 per year.  
  • Finally, they started documenting their process and procedures to create new products and we were able to take an R&D tax credit which saved them an additional $40,000 per year in taxes.  

Through all the strategies above we were able to take their effective tax rate from 26.4% to an average of 10.2%. That is close to a 15% decrease in their tax rate, and they generated close to $1.9 million in wealth. 

How is Whittaker Different? 

     As you can see there is not one single strategy that takes care of the situation. Through layering strategies together, we can achieve significant savings. Our team is trained in tax planning. We currently utilize more than 80 tax strategies and are always researching additional strategies to add to our library. Most CPAs (Certified Public Accountant) are not this sophisticated. They simply crank out the tax returns and refer to year-end tax calculations as tax planning. Not at Whittaker!  

If you would like to know how much you can save in taxes, click the link below to get the process started.