Ten years ago, I learned a hard and embarrassing lesson. I discovered that my clients really want me to save them taxes! Until that light came on, I was on the compliance treadmill. I thought my clients wanted me to keep them in compliance, avoid late penalties and prepare an accurate tax return. Even back then, those services were expected and unspoken.
When did I see the light? A realtor client of mine attended a tax seminar. He came back with an income-shifting tax strategy: he formally hired his wife and son as employees. They were already helping in the business, but by formalizing an employment relationship, he was able to save three types of taxes.
Then, it occurred to me, “Why wasn’t I the one to help him lower his tax burden?” Although it was disconcerting to realize I had missed this, it set me on a quest to master the tax code and discover advanced tax reduction strategies that would proactively help people minimize their tax bill. Of course, I continued to do traditional accounting work and prepare accurate tax returns, but the flame of proactive tax savings had been sparked.
I began earnestly studying the art of legally reducing taxes and the boundaries of the tax code determined by court rulings. I started talking with clients outside of tax season, before the year was over, about their business, family, retirement, financial goals, and health concerns so that I could help them enjoy life and live tax efficiently. It is rewarding to help people pay for college with their tax savings. It is fun to let the IRS pay for your vacation.
For example, during my quest, there was an analysis of the estates left behind by two very famous movie stars. One died with a simple will. The other formed a trust before he died. The difference in the amount of estate and income taxes paid was outrageous! Needless to say, the one who had the love and foresight to efficiently transfer his assets to his loved ones was successful in providing abundantly for their physical wellbeing for the rest of their lives. The children of the other actor saw millions of dollars go straight from their late father’s estate to the coffers of the IRS. They certainly were not paupers but with a little proactive planning, they could have inherited millions more. (Thankfully, estate taxes have decreased, but they go back up after 2025.)
Tax reduction planning is not for everyone. If you don’t pay any taxes, there are no taxes to save. But, if you are a successful small business owner, self-employed professional, farmer, rancher, or a real estate investor you have the opportunity to line up your activities with advanced tax strategies that will allow you the greatest tax savings. I have noticed that the most expensive mistake most business owners make is failing to legally minimize their taxes. Taxes can be a huge expense that hurts cash flow and profitability. Saving taxes year after year really adds up.
How can there be big tax breaks in the tax code? Doesn’t every CPA know the same thing? Don’t you tax guys and gals have the tax code memorized? No and no. The original federal tax return for 1913 was three pages long with one page of instructions. Today, there are hundreds of different forms and schedules and thousands of pages of instructions. Parts of the current Tax Code were taken verbatim from the 1954 code with some concepts dating all the way back to 1913. Every two years, a new Congress implements “better ways” to make the tax code “fair.” The result is a hodgepodge of clashing priorities that result in seismic shifts in the tax code that leave crevasses in the tectonic plates of the code. These “cracks in the code” result in tax breaks that make no sense but are very lucrative. Ask Warren Buffet how much income tax he pays.
Of course, you know there are federal excise taxes on cigarettes and alcoholic beverages. These are also known as “sin taxes.” Sorry, I have no strategies to save taxes on these items other than don’t buy them.
Here is a taste of my secret sauce, the Seven Tax Reduction Fundamentals:
- Income Shifting – involves transferring income to other people or entities, or future years to minimize taxes.
- Expense Shifting – transfers expenses from future years to the present. Two good examples would be Bonus Depreciation and Cost Segregation.
- Tax Loopholes – take advantage of tax incentives authorized by Congress to reward taxpayers to take or refrain from certain actions.
- Tax Credits – are much better than deductions because they offer a dollar-for-dollar reduction in taxes. Education credits offer tax breaks so people will seek higher education (attend college).
- Tax Exempt Income – usually refers to municipal bonds but may also include life insurance benefits and other specialized income.
- Tax Deferred Income – allows taxpayers to postpone the payment of tax to many years in the future. Tax paid in future years are paid with dollars that have decreased in value because of inflation.
- Tax-Advantaged Investments – covers a broad range of investment vehicles including annuities and life insurance. The key is to make sure to match the vehicle to your situation.
By the way, my quest led me to become a Certified Tax Strategist with access to a network of hundreds of likeminded tax reduction experts.
Aric Schreiner, CPA, PFS, Certified Tax Strategist, helps successful professionals and small business owners strategize to reduce taxes and audit risk.
