How Much Should a Wealthy Family Set Aside for Taxes Each Year?

If your family has built significant wealth, taxes can become one of the largest expenses in your financial life.

And yet, many wealthy families still approach taxes the same way they did when they were younger and earning a salary:

Wait until the end of the year, gather the documents, send everything to the accountant, and find out what happened.

That may work for tax preparation.

But it is not really tax planning.

So, how much should a wealthy family set aside for taxes each year?

The short answer is: enough to cover your expected tax liability without unnecessarily keeping large amounts of cash sitting on the sidelines.

The longer answer is a little more complicated.

Your ideal tax reserve depends on where your income comes from, when you receive it, whether you own a business, how much investment income you generate, whether you are selling appreciated assets, and where you live.

For high-net-worth families in Chicago and across Chicagoland, the goal should not simply be to ask, “How much will we owe in taxes?”

The better question is:

“How can we plan for taxes throughout the year so that we know what we are likely to owe—and make smart decisions before December 31?”

But first – hello! I’m Charlie.

I’m a CPA and CFP® professional, and I help pre-retirees, retirees, and affluent families create tax-efficient financial plans.

Let’s get into it.

How Much Cash Should a Wealthy Family Keep for Taxes?

There is no universal percentage that every wealthy family should set aside.

A family earning $1 million from a business could have a completely different tax situation than a retired couple withdrawing $500,000 from investment accounts.

That is why simply saying, “Set aside 30%,” or “Set aside 40%,” can be misleading.

Instead, I would encourage affluent families to estimate their annual tax liability and update that estimate throughout the year.

Your tax reserve should account for things like:

• Employment income

• Business income

• Investment income

• Dividends

• Interest

• Capital gains

• Retirement account withdrawals

• Roth conversions

• Stock sales

• Real estate transactions

• Trust income

• Charitable giving

• State and local taxes

The more sources of income you have, the more important it becomes to monitor taxes proactively.

For some families, taxes are relatively predictable.

For others, one transaction can dramatically change the entire picture.

Selling a concentrated stock position, exercising stock options, selling a business, or realizing a large capital gain can create a tax bill that is significantly different from the previous year.

That is why wealthy families should not think of tax planning as a once-a-year event.

Why a Percentage-Based Tax Rule Can Be Dangerous

Let’s say you decide to automatically set aside 35% of every dollar you earn.

Sounds simple, right?

Maybe.

But what happens if your income comes from several different sources that are taxed differently?

What happens if you sell an investment with a large embedded gain?

What if you have a year with significant deductions?

What if you complete a Roth conversion?

What if you sell your business?

A simple percentage may leave you with too little reserved for taxes—or far more than you actually need.

And there is another issue.

Money sitting in a checking account waiting for a tax bill is not necessarily helping you accomplish your other financial goals.

You may need some of that money for:

• Retirement spending

• Investment opportunities

• Charitable giving

• Gifting to family

• A home purchase

• Business opportunities

• Liquidity reserves

The goal is not to set aside the largest possible amount.

The goal is to set aside the right amount.

That requires running the numbers.

What Should Wealthy Families Include in Their Annual Tax Budget?

A good annual tax budget should look beyond your federal income tax bill.

For affluent families, taxes can show up in multiple places.

You may need to account for:

Federal Income Taxes

Your federal income tax liability will depend on your total taxable income and how that income is generated.

A family earning a high salary may face a very different tax situation than a retiree living partially from brokerage accounts and partially from retirement accounts.

This is one reason tax-efficient retirement income planning can be so valuable.

The source of the money matters.

State and Local Taxes

Where you live can have a major impact on your total tax bill.

For families in Chicago, the North Shore, Naperville, Hinsdale, La Grange, Oak Park, Evanston, and other parts of Illinois, your state and local tax situation should be incorporated into your overall financial plan.

And if you are considering moving in retirement?

Taxes should be part of the conversation before—not after—you make the move.

Capital Gains Taxes

A large portion of your wealth may be tied up in appreciated investments, real estate, or a business.

That means your net worth and your after-tax wealth are not necessarily the same thing.

A $5 million portfolio is not the same as having $5 million available to spend.

If significant capital gains are involved, your tax liability may change substantially depending on how and when you sell assets.

Retirement Account Taxes

This is a big one for wealthy pre-retirees and retirees.

You may have millions of dollars in traditional retirement accounts.

That sounds great.

But remember: the balance you see on your statement is not necessarily the amount you will ultimately have available to spend.

Taxes may apply when money is withdrawn.

That means your retirement income strategy and tax strategy should work together.

When Should You Set Aside Money for Taxes?

Ideally, throughout the year.

I would much rather see a wealthy family regularly reviewing their estimated tax liability than waiting until tax season and hoping for the best.

A good process might include reviewing your tax picture:

• At the beginning of the year

• After a major bonus or income event

• Before selling appreciated investments

• Before making a large retirement account withdrawal

• Before completing a Roth conversion

• Before selling a business

• Before year-end

• After any major change in your financial situation

You do not need to obsess over your tax return every week.

But you should know whether you are generally on track.

Think of it like driving a car.

You would not close your eyes for 12 months and hope you arrive at the right destination.

You check the road.

You make adjustments.

Tax planning should work the same way.

How Can Wealthy Families Avoid Being Surprised by a Large Tax Bill?

The best way to avoid surprises is to project your taxes before the year is over.

This is where tax preparation and tax planning are very different.

Tax preparation tells you what happened.

Tax planning helps you evaluate what could happen.

For example, before realizing a large capital gain, you might ask:

What will this transaction do to our overall tax picture?

Before completing a Roth conversion:

How much additional income are we creating?

Before selling a business:

What will we actually keep after taxes?

Before retirement:

How should we create income from different accounts in a tax-efficient way?

These are planning questions.

And in many cases, they are most valuable before the transaction happens.

Once the year is over, some opportunities may be gone.

Should Wealthy Families Keep Their Tax Reserve Separate?

In many cases, yes.

Keeping money designated for upcoming tax payments separate from your everyday spending and long-term investments can make it easier to see what is actually available.

For a family with predictable income, this might be relatively straightforward.

For a business owner, investor, or family with highly variable income, the tax reserve may need to be adjusted throughout the year.

The key is visibility.

You should be able to answer:

How much do we expect to owe?

How much have we already paid?

How much do we still need to reserve?

If you cannot answer those questions, there is probably an opportunity to improve your planning process.

The Bottom Line: How Much Should a Wealthy Family Set Aside for Taxes?

There is no magic percentage.

A wealthy family should set aside enough to cover its projected tax liability based on its expected income, investment activity, retirement withdrawals, business transactions, and other major financial decisions.

But the real opportunity is not simply building a bigger tax reserve.

It is understanding your tax situation early enough to make better decisions.

You worked hard to build your wealth.

The goal is not to spend your retirement worrying about an unexpected tax bill—or wondering whether you are paying more than necessary.

A thoughtful financial plan should coordinate your investments, retirement income, taxes, charitable giving, and long-term goals.

Because the best tax strategy is rarely one single move.

It is a series of smart decisions made over time.

Have you run the numbers?

My name is Charlie Horonzy, CFP®, CPA. I help pre-retirees, retirees, and affluent families in Chicago, throughout Chicagoland, and across the country create tax-efficient financial plans.

You’ve worked hard for your retirement.

Don’t let poor planning send more of it to Uncle Sam than necessary.

Stay Focused!

This article is for general educational purposes only and is not individualized tax, investment, or financial advice. Your appropriate tax strategy depends on your individual circumstances.

Source: ChatGPT