How to Avoid Unnecessary Taxes During a Financial Transition
Major financial transitions often come with major tax consequences.
Changing jobs, retiring, receiving a company buyout, selling a business, exercising stock options, or receiving a large amount of investment income can all change your tax situation. The mistake is waiting until tax season to think about it. By the time you’re sitting down to prepare your tax return, many of the decisions that could have affected your tax bill have already been made.
Tax planning is different from tax preparation. Tax preparation looks backward at what happened. Tax planning looks forward and asks:
What decisions can we make now that may improve the tax efficiency of the overall financial plan?
That doesn’t mean every decision should be made solely to reduce taxes. Sometimes paying more tax is the right decision if it helps accomplish a larger financial goal.
The objective is to understand the tradeoffs and avoid paying more tax than necessary while keeping your broader financial plan on track.
Here are seven tax-planning considerations to evaluate during a major financial transition
1. Understand How the Transition Changes Your Income
The first step is understanding how the financial transition changes your income for the year.
A job change, retirement, or liquidity event can create an unusually high or unusually low income year.
For example, you might have:
Salary from two employers in the same year
A large bonus
Severance
Stock compensation
A company buyout
Capital gains from selling investments
Retirement account distributions
Pension income
Social Security
Business income
A large one-time payment
The combination can be very different from your normal annual income.
That’s important because many tax decisions depend on your overall income for the year—not just one individual transaction.
Before making a major financial decision, it’s worth asking:
What will my total taxable income look like this year?
Then consider how the decision you’re contemplating could change that number.
For example, selling a large investment position may create capital gains. Taking a large distribution from a traditional retirement account may increase ordinary income. Receiving additional compensation may push more income into a higher marginal tax bracket.
Understanding the potential impact before making the decision gives you more options.
2. Don’t Treat Your Tax Return as a Planning Document
Your tax return is an important source of information, but it tells you what happened last year.
It doesn’t necessarily tell you what you should do this year.
This distinction becomes particularly important during a financial transition.
If you retired this year, changed jobs, sold a business, or received a large liquidity event, your current-year tax situation could look very different from your previous return.
A useful starting point is to look at:
Prior-year taxable income
Current-year income received so far
Expected remaining income
Capital gains and losses
Retirement account distributions
Withholding
Estimated tax payments
Potential deductions or charitable contributions
Significant transactions expected later in the year
The goal is to create a reasonable projection of where you’re headed rather than waiting until the following April to discover the result.
3. Coordinate the Timing of Income and Gains
Timing can matter.
You may have some control over when certain income or gains are recognized, particularly when you’re dealing with investment sales, retirement distributions, business transactions, or compensation decisions.
For example, someone who retires partway through a year may have significantly less earned income in the following year.
That could create a different tax-planning opportunity than the year they leave work.
Similarly, someone receiving a company buyout may have several decisions involving stock, cash proceeds, or future payments that occur across different tax years.
Capital gains and qualified dividends also interact with your overall income level. The IRS notes that capital-gain taxation depends on income, and estimated-tax planning may need to be adjusted when income changes during the year.
The key isn’t to delay every transaction.
It’s to understand whether when something happens could be as important as what happens.
4. Be Intentional About Retirement Account Withdrawals
Retirement can fundamentally change the tax equation.
Before retirement, you may have focused primarily on contributing to retirement accounts and accumulating assets.
After retirement, you have to decide how to turn those assets into income.
That raises questions such as:
Should withdrawals come from taxable accounts, traditional retirement accounts, or Roth accounts?
How much should you withdraw?
Should you consider Roth conversions?
How will withdrawals affect your taxable income?
How will future required minimum distributions affect the plan?
How will your withdrawals interact with Social Security and other income?
There isn’t a universal withdrawal sequence that is right for everyone.
For some households, intentionally recognizing additional income in certain lower-income years may make sense. For others, preserving tax-deferred assets may be more valuable.
The important thing is to look at the decision over multiple years rather than focusing exclusively on this year’s tax bill.
Retirement distributions can also involve withholding and estimated-tax considerations. The IRS notes that taxable retirement distributions may be subject to withholding and that insufficient withholding can result in a need for estimated tax payments.
5. Don’t Let Taxes Keep You in a Risky Investment
One of the most common tax-related investment mistakes is allowing the tax bill to dictate the entire investment decision.
This can happen when someone has accumulated a large position in company stock or another highly appreciated investment.
They may think:
“I don’t want to sell because I’ll owe too much in capital gains.”
That’s understandable.
But there is a difference between avoiding a tax bill and avoiding an investment decision.
If a position has become too large relative to your overall portfolio, continuing to hold it may expose you to substantially more investment risk than the potential tax savings justify.
The right question may be:
“What is the most tax-efficient way to reduce this risk?”
Depending on the circumstances, that could involve:
Selling gradually
Coordinating gains and losses
Managing the amount sold each year
Donating appreciated securities
Using charitable strategies
Coordinating sales with other income
Establishing a long-term diversification plan
The goal isn’t necessarily to eliminate the tax.
It’s to make the investment and tax decisions together.
6. Look for Planning Opportunities Around Charitable Giving
Major financial transitions can also create opportunities to revisit charitable giving.
If you’re already planning to make charitable contributions, the way you make those contributions may matter.
Depending on your circumstances, strategies involving appreciated securities, qualified charitable distributions, or other charitable-planning techniques may offer different tax consequences.
For example, donating an appreciated investment directly rather than selling it first and donating cash can sometimes produce a different tax result.
The appropriate strategy depends on your circumstances, the type of asset, your charitable goals, and the applicable tax rules.
The broader principle is simple:
If charitable giving is already part of your financial life, consider the tax implications before deciding how to give.
7. Coordinate Tax Planning With the Rest of Your Financial Plan
Tax planning works best when it isn’t done in isolation.
A decision that reduces your taxes today may create a different consequence somewhere else.
For example:
Selling an investment may reduce portfolio risk but create capital gains.
A Roth conversion may increase current taxable income but potentially reduce future tax exposure.
Taking a larger retirement distribution may provide needed cash but push more income into a higher tax bracket.
Making a large charitable contribution may accomplish a philanthropic goal while also affecting your tax situation.
Diversifying company stock may reduce concentration risk while creating a tax liability.
This is why tax planning should be viewed as one part of the broader financial plan.
The goal isn’t:
“How do I pay the least amount of tax?”
The better question is:
“How do I make financially sound decisions while being as tax-efficient as reasonably possible?”
That distinction matters.
Three Times to Think About Taxes
Tax planning can be particularly valuable at three points during a financial transition.
Before the transition
This is often when you have the most flexibility.
You may be able to evaluate the timing of a transaction, coordinate with your tax professional, review investment positions, or consider potential tax consequences before a decision becomes irreversible.
During the transition
As the transition unfolds, circumstances may change.
Income may be higher or lower than expected. A transaction may close earlier or later. Investment gains may change. You may receive additional compensation or proceeds.
Your tax projection should evolve with the circumstances.
After the transition
Even after the major event has occurred, there may still be planning opportunities.
You may need to:
Rebalance your portfolio
Adjust estimated tax payments
Plan retirement account withdrawals
Evaluate Roth conversions
Manage capital gains
Review charitable giving
Prepare for future tax years
The transition may happen on a particular date, but its financial consequences can continue for years.
Tax Planning Is About More Than Saving on This Year’s Tax Return
It’s tempting to measure tax planning by one number:
“How much did I save on my taxes?”
But that’s not always the right measurement.
A strategy that saves $10,000 today but creates a substantially larger tax bill later may not be beneficial.
Likewise, paying additional tax today may be reasonable if it reduces future tax exposure, improves diversification, or gives you greater flexibility.
Good tax planning considers the long-term tradeoffs.
That’s particularly important when you’re making decisions involving significant assets.
Work With Your Financial Advisor and Tax Professional
Financial advisors and tax professionals have different roles, and the best results often come from coordinating the two.
Your CPA or tax professional can provide tax advice and prepare your tax return.
Your financial advisor can help incorporate tax considerations into decisions involving:
Investments
Retirement income
Portfolio diversification
Company stock
Retirement accounts
Cash flow
Charitable giving
Long-term financial goals
The two perspectives can complement each other.
The goal is to avoid making a major financial decision in isolation simply because it appears attractive from one perspective.
A Financial Transition Is an Opportunity to Revisit the Whole Plan
A major financial transition can change much more than your tax return.
It can change your income, investments, retirement timeline, insurance needs, estate plan, and financial goals.
That’s why tax planning is most useful when it’s part of a broader conversation.
Whether you’re leaving a job, approaching retirement, or receiving a company buyout, the most important question isn’t simply:
“How can I reduce my taxes?”
It’s:
“How can I make the best financial decisions for my situation while being as tax-efficient as possible?”
That is the role of thoughtful tax planning within a broader financial plan.
Going Through a Major Financial Transition?
You don’t have to wait until tax season to start thinking about the consequences.
Oakway Financial helps individuals and families navigate major financial transitions with ongoing investment management and financial guidance. We work with clients to evaluate how investment, retirement, tax, insurance, and other financial decisions fit together as their circumstances change.
If you’re approaching a major financial transition and want to understand the financial decisions ahead, we’d be happy to start a conversation.
Related Resources
Oakway Financial helps individuals and families navigate major financial transitions—including retirement, job changes, and company buyouts—with ongoing investment management and financial guidance.
Disclosures: All investments and strategies have the potential for profit or loss. Different types of investments involve higher and lower levels of risk. There is no guarantee that a specific investment or strategy will be suitable or profitable for an investor's portfolio. There are no assurances that a portfolio will match or exceed any particular benchmark. Advisory services are offered through Aegis Wealth Management, Inc.. The firm is registered as an investment advisor with the SEC and only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the advisor has achieved a specific level of skill or ability. The content of this article has been created with the assistance of artificial intelligence. Content should not be regarded as a complete analysis of the subjects discussed and should not be viewed as an offer to buy or sell the securities discussed. It should not be viewed as personalized investment advice. You should consult with a professional advisor before implementing any strategies discussed. Tax information provided is general in nature and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. Tax rules are subject to change at any time.