A Case Study on Proactive Tax Planning (Part I of III)

A Powerful Way to Grow Your Money (Part I of III)

The Big Picture

As tax advisors and CPAs, teamwork is one of the greatest things we can do for our clients. Knowing a client’s finances can lead to significant tax savings options, such as splitting losses among several investment accounts, converting to a Roth, or implementing retirement planning methods. This article shares a real-life example of the benefits of a defined benefit plan, which may not initially appear like a tax-saving measure to advocate.


Andres is a 68-year-old dentist who lives in California, a state that collects income taxes. A successful practice generates a net income between $350,000 and $400,000. He works with his 64-year-old spouse and a separate person who manages the practice’s administration and makes about $50,000 annually. His CPA is responsible for filing Jose’s tax return and the practice’s taxes.

He has a (Sec. 401(k)) in place for retirement planning with a safe-harbor provision, enabling them and their employee to defer the maximum in their 401(k)s. Jose’s wife worked and earned enough to qualify for the $27,000 maximum deferral in 2021. Jose made a profit-sharing contribution of about $9,000 on her behalf. Jose was also required to pay the unrelated employee’s profit-sharing payment, which was $3,000 in 2021. Following the current plan, Jose could defer a maximum of $27,000 for himself and a $40,500 profit-sharing contribution for a total of $67,500. Jose and his wife deferred about $103,500 in income ($27,000 each, plus $40,500 in profit-sharing for Jose and $9,000 for his spouse).

Savings on current taxes: Jose pays about 40% of his salary in taxes, both federal and state. Regarding the couple’s benefit, the impact of the current plan led to total deferrals of about $103,500, resulting in a total tax savings of about $41,400.

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