Your Effective Tax Rate Is a Wealth Trend. Are You Watching It?
Yesterday was tax day and I can say with almost certainty that you probably filed late. There’s no shame in it. I’ve filed late more years honestly. But I’ve also offset my taxes most years and 7X my net worth doing it but this isn’t about me. This is about you and for you.
Whether you filed late or not shows your systems. Whether you are building wealth or not shows your understanding. If you pulled your last three tax returns, could you find them? Would you know your effective tax rate? The difference from the six, seven or eight figure entrepreneur is that they know their numbers inside and out. The nine figure? Lives by them and has a team who does too. Your effective tax rate is the actual percentage of your total income that went to taxes, after every deduction, every credit, every strategy your CPA applied.
Now look at that number across three years. Did it go down? Stay flat? Go up?
That trend tells you more about your wealth trajectory than any revenue milestone does. Because revenue is going up while your effective rate stays flat or climbs means the government is scaling with you. Every point of growth, they're capturing a proportional share which signals a strategy problem.
Most entrepreneurs have never pulled this number. They know gross revenue. They know net income. They don't know what percentage of what they built actually stayed and they definitely don't know what that compounded over ten years means in real wealth left on the table. (This is where working with a tax strategist who creates a plan to implement intentionally creates wealth not just chaos.)
A three-year tax review is a wealth audit and tells you whether your CPA is a reporter or a builder.
Builders use the tax code as an accumulation tool. Decisions made intentionally over a three-year window, create a compounding gap between what you paid and what you could have paid. That gap is wealth. And the absence of it is the most invisible cost in most entrepreneurs' financial lives.
The entrepreneurs I've worked with who feel most at peace with their wealth aren't the ones with the lowest bills, they're the ones who understand the trend and who have a team actively working to shape it. Knowledge removes the anxiety and the unknown is what's heavy.
The Weight of Not Looking
There's a reason most entrepreneurs don't pull their last three returns and lay them side by side. It's not laziness. It's the same reason most people avoid the scale when they know they've been off track. Looking makes it real.
But the weight of not looking is heavier than the weight of the truth. The avoidance costs more than the answer. If you’re feeling uneasy in this issue, I outlined some steps you can take to have a different next year.
The Three-Year Tax Reflection: A Wealth Audit in 5 Steps
This playbook is designed to be done while we are still in April. Since it’s top of mind, set it up and knock it out. It takes less than an hour. What it surfaces can take years off the cost of building without a real strategy.
Calculate your effective tax rate for each of the last three years. Find your total tax paid (federal plus state) on each return, then divide by your total gross income. That percentage is your effective rate. Write it down for all three years. Then look at the trend: down, flat, or up. That trend is your starting point for every conversation that follows.
Identify the single largest tax driver in each year. Was it ordinary income from your business? Pass-through distributions? Capital gains from an investment or partial sale? Knowing what drove the number tells you whether it was managed or just reported. If ordinary income has been your primary driver for three years and your rate hasn't moved, that's the first conversation to have.
Audit your depreciation and retirement contributions across all three years. Were retirement contributions at the legal maximum or just somewhere below it? Was accelerated depreciation applied to equipment, property, and eligible assets or did everything default to straight-line? These are two of the highest-leverage levers available to a high-income entrepreneur, and they're the two most commonly underused. Look at each year and ask: was this maximized, or just included?
NOTE: The tax code has been studied and mastered by your CPA. If you are unsure if they are helping you to the extent they could now is the time to explore other options otherwise, next year will end up like the last three years.Run the 5% calculation. Take your average annual income across the three years. Calculate what a 5% reduction in your effective rate would have returned each year. Then multiply by three. That number is the cost of an unoptimized strategy over just this window. That's the number to bring into your next conversation with a CPA or advisory team to learn how that’s possible. Why 5%? It’s more possible than 95% but it depends on your strategy and your strategist.
Ask your CPA one direct question: 'What specific actions did we take in each of these three years to reduce my tax liability?' If the answer is thin, general, or focused entirely on compliance, that's data too.
Use this framework to run the review:
What to Measure | Year 1 (2025) | Year 2 (2024) | Year 3 (2023) |
Gross income | $ ________ | $ ________ | $ ________ |
Total taxes paid | $ ________ | $ ________ | $ ________ |
Effective rate | _____% | _____% | _____% |
Primary income driver | ________ | ________ | ________ |
Retirement contributions | $ ________ | $ ________ | $ ________ |
Max contribution allowed | $ ________ | $ ________ | $ ________ |
Depreciation method used | ________ | ________ | ________ |
Entity structure changed? | Y / N | Y / N | Y / N |
5% rate reduction = $ | $ ________ | $ ________ | $ ________ |
COPY-PASTE: The One Question to Send Your CPA This Week
Hey [Name] — I've been thinking about our last three years of returns together and I want to understand the trend better. Can you walk me through:
What was my effective tax rate in each of the last three years?
What specific actions did we take in each year to reduce my liability beyond standard deductions?
Have my retirement contributions been at the legal maximum each year?
Is my current entity structure still appropriate for where my income is now — and where I'm going?
Looking at the three-year picture, what would you do differently if we were starting fresh today?
A CPA who welcomes that question is a CPA building with you. One who deflects it is one who's been filing for you. There's a difference.
REAL-WORLD CASE SPOTLIGHT
His CPA Had Never Made a Mistake
If you're staring at a significant tax liability and wondering whether anything can still reduce it, this is one of the few tools that can create a real, meaningful in-year deduction even now, before you file.
Oil and gas investments, specifically the intangible drilling costs (IDCs) associated with working interests, have a tax treatment unlike almost any other investment class. In the year of the investment, IDCs are typically deductible at 70–80% of the invested amount against ordinary income. This can be more but this seems to be what I have seen over the past five years.
For an entrepreneur generating significant W-2 income, pass-through income, or a combination, this can be a meaningful offset. Unlike many real estate strategies, working interest investments in oil and gas are generally not subject to passive activity loss limitations, which means the deduction isn't trapped against passive income. Talk to your CPA to see what they know, if they don’t know reach out to me as I have found two out of five CPAs don’t have the best understanding of
TLDR: oil and gas with IDC can offset active income (meaning W2 or corporate salary) and tax advantaged investments can have 15-30% annualized returns
However, this is not a recommendation to invest. It's a category worth understanding and worth raising with your tax advisor before you file, particularly if your liability is higher than expected and you have capital available to deploy strategically. The investment risk is real. So is the tax treatment. There are also leveraged tax strategies that have a 5:1 ratio. Oil and gas has about a 1:1 meaning $100,000 invested offsets about $100,000 based on your tax rate. Need more capital, consider more leverage.
WANT TO GO DEEPER?
RReply AUDIT and we'll run a three-year tax review and show you the real trend.
No benchmarks. No judgment. Just the actual picture — and what it means.
Four Tools to Run Your Three-Year Audit
Tool 1: Effective Rate Calculator Divide your total taxes paid (federal plus state; specifically line 24 on your 1040 plus the state equivalent) by your total gross income (line 9 on your 1040). Calculate this for each of your last three tax returns to determine your true effective tax rate.
Tool 2: IRS Retirement Contribution Limits Visit IRS.gov to find the annual maximum contribution limits for SEP-IRAs, Solo 401(k)s, defined benefit plans, and traditional IRAs. Pull the specific limits for the last three years and compare those figures against your actual contributions to identify missed opportunities.
Tool 3: Depreciation Schedule Review Review your Form 4562 from the last three years, specifically checking the "method" column for straight-line versus MACRS accelerated depreciation. If high-value assets like real estate or equipment were depreciated using the straight-line method when accelerated options were available, consult a CPA about a potential tax amendment.
Tool 4: The 5% Wealth Calculation Calculate your average annual income over the last three years. Multiply that average by 5%, then multiply the result by 3. This figure represents a reachable financial target that, with a proper strategic plan, could serve as a foundation for significant wealth growth.
QUESTION FOR YOU
Do you know your effective tax rate trend over the last three years — and if not, what has that cost you in clarity about your own wealth?
I spoke with a doctor last week who was paying about $90k each quarter in taxes and he was ok with it. Would you be? He felt like it was more of a chore to reduce or optimize taxes but he’s also in a stage of life where he is going with the flow. THIS is where I find the difference between a business owner and an entrepreneur. Entrepreneurs aim to live up to their potential, not just live. The choice is yours.
THIS WEEK I'M READING / THINKING ABOUT
My team officially launched the relaunch show and we encountered several challenges along the way with RSS feeds, Riverside, Bluburry, website, Spotify and our release schedule. If you feel like you’re failing, read what I wrote on LinkedIn.
Using AI to Audit and Avoid Extra Cloud Spend
In this episode, Max from CloudGo.ai explains how companies bleed millions in cloud spend.
Discover how to audit your environment to ensure your tech stack is ready for VC due diligence or a single engineer becoming a point of expensive failure.
BEFORE YOU GO
This could be uncomfortable financially and emotionally. feeling like you let your employees, your family, and yourself down. That could truly knock you off your rocker, but it won't because you're going to stand firm in it. A good friend of mine shared this perspective this week about being an oak tree. Regardless of what is happening to you or around you, just observe and be in an oak tree. learn what you can do and observe what has been done. Being a tree is hard because you grow in both directions. Growing is uncomfortable but to the ones who dare you are rewarded.
Dare to audit your last three to benefit your next thirty. Next week is the final issue of Tax Month, come prepared.
More next week.
— Paul H. Graham