Tax Strategy and Tax Planning

Managing Taxes through Planning

When it is time to file your tax return, the year in question has been over for 3-10 months, leaving your prior year already completed and the upcoming year significantly over. By having an annual tax strategy discussion, and periodic tax planning meetings, we can change your tax obligation by taking action ahead of time, and make midyear course corrections if your situation changes. Basic compliance is required, but planning and strategy is how we work together to save you substantially on taxes.

Bette Hochberger Lying on Grass

“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”
– Judge Learned Hand, Chief Judge of United States Second Circuit Court of Appeals

Arranging your business affairs in the proper manner may serve to minimize your taxes and maximize your wealth generation. Your wealth isn’t tied to what you earn, but rather, what you keep. Minimizing excessive costs including taxes, penalties, and interest costs help you build your wealth. Proper tax planning can involve tracking revenues for estimated payments, utilizing the right business structures, using tax advantaged accounts to their fullest, and other strategies that help you maximize the transference of dollars to your balance sheet with minimal taxes interfering.

Developing a Tax Strategy focuses on a combination of areas including: business structure and taxes, deductions and credits, tax deferrals accounts, and estate and trust tax planning.

Business Structure and Taxes

Early Decisions with an Impact

Simple pass-through entities are the easiest, but subject your income to self employment taxes (15.3%) in addition to standard income taxes. Utilizing an S-Corporation allows you to shield some of your income from Self Employment by paying it via Payroll. Utilizing a C-Corporation structure gives shareholders complete protection from personal liability and lets you bring in investors, but if you want to draw the profits out of the business, you need to pay taxes on the dividends, which results in the dreaded double taxation. Depending on your expected cash flow and exit strategy, we will want to set up a business structure that is most advantageous.

World of Deductions and Credits

Tax Credits and Tax Deductions

Credits, which are a dollar for dollar reduction in taxes, and deductions, which reduce your income, are the most commonly known part of the tax code. While you can simply live your life and see what happens, proper tax strategy involves making a plan at the beginning of the year to maximize your family’s ability to get these tax deductions and tax credits. These items are classified by the government as “tax expenditures,” because they are essentially virtual checks from the government to you in reduced taxes. Getting these benefits may be straight-forward (child tax credits don’t involve planning, other than having a child), or more complex like Increasing Research Activities Tax Credits (known as the R&D tax credit), or the former Domestic Production Activities Deduction that was phased out over the past few years.

Research and Development Credit

and Other Tax Credits

The recent tax reform removed the Domestic Production Activities Deduction (DPAD), but preserved the R&D Tax Credit that is very valuable for start up businesses. We can anticipate the next administration building on the existing Investment Tax Credit (ITC) for Solar Power and other clean energy and renewable options. A variety of niche tax credits may be of interest to you and your business, and structuring your payment structures to maximize those credits can be an important part of tax planning.

Retirement Accounts?

or Health Savings Accounts and Insurance

If you qualify for a Health Savings Account, you can save money with before tax dollars, and get it back in after tax dollars as long as you can tie it to medical expenses. Retirement Accounts come in two forms, Traditional (you save pre-tax dollars, and pay taxes in retirement), and Roth (you save post-tax dollars, never taxed when the money comes out). Insurance Company products can accomplish a large range of financial goals that benefit from the tax advantaged nature of retirement. Tax strategies can involve moving “high tax bracket income” today into “low tax bracket income” in the future, so tax deferral seems neutral until you consider that you can structure your deductions at higher tax brackets and withdraw it over time in retirement at lower tax brackets.

One challenge people have is that the information on these investment and insurance products primarily comes from the companies themselves or their commissioned sales representatives. Finding impartial fee-only advisors is terrific once you have an investment strategy. We are not investment advisors, have no financial incentive to sell you an investment product, but can help you develop a tax strategy to maximize your investment dollars and minimize your tax obligations.

Estate and Trust

Tax Planning around Inheritance Tax

Estate planning, including the use of trusts, is a legal matter that requires working with an attorney that specializes in these vehicles, and we can recommend several good ones. However, the tax strategies that plan a role in those trusts and transfers are our area of expertise, and we can work with you and your attorney to develop the right plan methodology of wealth transfers. Strategies that maximize taking advantage of things like stepped up basis and minimizing things like estate taxes are critical to the preservation of wealth across generations.

Success doesn’t just find you. You have to go out and get it.

Your Success is Our Success!