Tax Planning
To reduce your tax liabilities, you need tax planning services that prioritize efficient tax strategies.
A successful, legal way to reduce your taxes requires an expert advisor who not only keeps you tax compliant but also employs tactics to increase your after-tax income legally and proactively.
The tax planning firm that you choose should have experience of helping businesses like yours reduce their Federal and Arizona taxes.
Tax law is complex and new regulations and laws are introduced each year. Keeping up with these changes and amendments requires intimate knowledge of the tax code together with regular attendance at tax seminars and courses to keep up to date with the latest information.
But that is often not enough.
Tax planning encompasses legal company structures, trusts, estate planning, and complex investment structures, together with business continuity and retirement planning. Combining all these skills is what sets successful tax planning firms apart from those firms that just follow the tax code.
And tax planning is not just something you do at the end of the financial year.
A proper tax strategy takes year-long planning. Structures must be in place to ensure your long-term goals become part of the process.
This way, you and your family hold on to as much of your hard-earned money as legally possible.
The Five Ways to Legally Avoid or Reduce Your Tax
In a nutshell, tax planning comes down to five things:
- • Deductions
- • Deferment
- • Division
- • Disguising
- • Dodging
Here’s what you can do with each of these tax planning concepts to ensure that you pay the least amount of Federal and state tax that you legally must.
Tax Deductions
Tax deductions come in many different types and knowing how you can structure your affairs to take maximum advantage of the tax deductibility of your expenses is the first step in reducing your tax liabilities.
There may be some expenses that you failed to claim in the past that you can now include in your list of deductions. By making changes to the way you pay for your expenses, you can increase the pool of allowable expenses that you claim against your income. If you can prove that the expenses are directly related to one or other of your income streams, then you can claim them as a deduction.
This is where your tax planner’s experience comes in. They will help to put structures in place to maximize these deductions and keep track of them so that you can claim them when it’s time to submit your tax return.
Deferring Your Tax Liability Can Make You Wealthy
Deferring your tax liability for some time in the future, allows you to use the money that you would normally have to pay over to the IRS today until it is legally owed.
Depending on the size of the deferment amount, it can add up to a sizable total. If that money is used to expand your business or reduce high-interest debt, the returns can be considerable. Always remember that inflation slowly chips away at your purchasing power. So, the amount owed today, but only due for payment in a year (or longer), will be settled with cheaper money.
The situation gets even better when you consider that you can earn interest on that money during the period until it’s due.
Here’s a simple example:
Let’s say that you owe $100 in tax this year, but you only have to pay for it in 10 years. While you are not eliminating the tax due, when you pay that tax, the money you use will be worth less in today’s value.
The Congressional Budget Office predicts that inflation will average 2.2% over the next few years to 2030. Your $100 will therefore be worth approximately $80 in 10 years. That may not seem like much, but what if you use that money to pay off your credit card debt or a high-interest loan?
With the average APR on credit cards currently sitting at around 16.17%, the amount of money you will save by paying off your credit card instead of making monthly payments is equal to more than $100 for every $100 you borrow.
If you now take the money that you would have spent on paying back the credit card ($1.69 per $100 paid over 10 years) and invest it, either in your own business, property, or some other safe investment asset, you’ll find that the government has effectively given you your money back.
Even a modest 3% return on your money will deliver $236 in 10 years, for every monthly $100 credit card repayment of $1.69 that goes towards an investment.
Your prudent tax planning will result in you settling your tax debt in 10 years while having an additional nest egg of $136 for each $100 of deferred tax.
If you are saving for your child’s education, for instance, you get deferred tax on investment growth as well as tax-free education-related withdrawals. This type of investment increases your tax savings and is another example of what can happen if you plan your tax affairs properly.
Division – Splitting Your Income
Our progressive tax system imposes increasing amounts of income tax as one’s earnings increase. This allows you to reduce your tax liabilities by dividing your income between family members who qualify for a lower tax rate.
By planning your distribution of income in advance, you’ll save large amounts of tax.
Disguising the Source of Your Income
While this sounds like something illegal, there are legitimate ways that you can reduce your income without running the risk of doing something illegal.
This is especially relevant for individuals who own businesses and are 100% shareholders in their company. When their tax affairs are carefully structured and the proper procedures are followed, huge tax savings can be achieved.
However, the firm doing your tax planning must be experienced and knowledgeable, and everyone involved is properly informed on what is required.
A finding by the tax court’s Judge Greaves in Clary Hood, Inc. v. Commissioner of Internal Revenue case, shows what can happen if the proper planning is not carried out.
While the company’s success was a real “rags-to-riches” success for its founder and his wife, this did not factor into the tax court’s findings. This family-owned business relied on the expertise of its accountants and auditors but was still penalized for understating income.
While the underlying structure and reasoning by the company’s auditors were sound and resulted in significant tax savings, the company failed to carry out the required administrative and accounting processes. This resulted in the court finding in favor of the IRS and penalizing the taxpayer.
This court case is instructive, in that you can reduce your tax liability substantially by changing the source of income from dividends to salary if you have the proper employment contracts, agreements, and corporate structures and board members in place to satisfy the legal requirements for doing so.
It’s worth remembering that not all income is taxed equally.
Dodging the Tax Net
Rather than being something illegal, putting structures in place to move taxable income from a reportable source to a non-taxable benefit or tax-free cash flow can have significant benefits for clients who are savvy enough to make use of the services of an experienced tax planner. To receive more information on how you can benefit from our Tax Planning Services, contact us today at (480) 674-5757.