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The Prosperity Briefing

Keeping You Informed And Ahead

Hidden Tax Traps

And How to Plan Around Them

  • 3 min read

Where Tax Problems Commonly Arise

Most costly tax mistakes happen during predictable transitions.

1. Business Sales
When selling a business, owners often focus on price and deal terms but overlook how the transaction is taxed.

How the proceeds are classified matters:
  • Ordinary income is taxed at higher rates 
  • Long-term capital gains are typically taxed at lower rates 
 
On top of that, factors like state taxes, the Net Investment Income Tax (NIIT), and the timing of when income is recognized can significantly affect what you actually keep. Poor structuring can shrink net proceeds more than expected.
 
2. Sudden Income Spikes
A strong year, bonus payout, or liquidity event can push income into a higher tax bracket.
 
This doesn’t just increase the top rate. It can also:
  • Trigger phaseouts of deductions and credits 
  • Expose more income to additional taxes 
  • Increase overall effective tax rate 
 
Without planning, more of that income becomes taxable than necessary.
 
3. Inheritance and Wealth Transfer
Passing or receiving assets brings a different set of tax challenges. Some assets benefit from a step-up in basis, which can reduce future capital gains taxes. Others don’t—and may carry built-in tax liabilities or required distributions.
 
Trusts can add another layer of complexity. If they aren’t structured properly, they can create unintended tax consequences for beneficiaries.
Hidden-Tax-Traps

Why Timing Matters More Than Strategy

Many business owners don’t think about tax strategy until:
  • The deal is already closed 
  • The income has already been received 
  • The assets have already been transferred 
 
At that point, most options are gone. The focus shifts from planning to damage control. The most effective tax strategies are implemented before the event occurs—when there is still flexibility.

How to Plan Around These Risks

Proactive tax planning isn’t about avoiding taxes entirely. It’s about controlling when and how they are paid.
 
Common approaches include:
  • Spreading income across multiple years to reduce bracket impact 
  • Evaluating entity structure before a sale or liquidity event 
  • Using charitable strategies to offset high-income years 
  • Aligning estate and trust structures with long-term tax efficiency 
 
These strategies are most effective when coordinated early and across advisors—legal, financial, and tax.

The Advantage of Planning Early

For high-income earners and business owners, taxes are not a separate issue. They are directly tied to major financial decisions.
 
The difference between reacting late and planning early is often measured in how much wealth you keep.

Until next time – Peace,

Eric

Principal, CPA/PFS

(504) 586-3050

erigby@therigbygroup.com

The information provided in this blog is for general informational and educational purposes only and is not intended to constitute, and should not be relied upon as, financial, accounting, tax, or legal advice. Cash flow forecasting and financial planning involve inherit risks and uncertainties, and results may vary significantly based on a variety of factors. By reading this blog, you acknowledge and agree to this disclaimer.

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