“Anyone 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.”
Gregory v. Helvering, 293 U.S, 465 (1935), a landmark decision by the United States Supreme Court, set rigid standards and also acknowledged that the tax law allows various deductions, credits, and allowances for use by a taxpayer. This form of “tax avoidance” is legal and supportive of the Congressional intent to encourage particular economic behaviors by the taxpayer, for example, owning a home. However, these “incentives” are difficult to find within the U.S. Tax Code, which is not your cozy, fireside reading material.
The difficulty of interpreting and applying the U.S. Tax Code drives many taxpayers to seek assistance preparing and filing their tax returns. The best tax preparers will ask you to complete a questionnaire and then utilize tax forms, statements, receipts, and miscellaneous documents to enter data into their tax software. After a rigorous review process, the final tax return is ready for signature and filing. Mission accomplished, and although you are one of the 99.9% of U.S. taxpayers who believe they pay too much in tax, you are ready to move on.
1. Understanding the U.S. Tax Code – Duh! This goes without saying. It is critical to know what is allowed, what is not allowed, and what is subject to interpretation – the famous “grey area.” Tax preparers often steer clients away from a tax-saving strategy because of a potential “Red Flag,” supposedly drawing IRS attention. Tax planning eliminates “Red Flags” by establishing a position allowed by the tax code or advising the client to take specific actions that allow the strategy.
2. Continuing Tax Education – Unfortunately, the tax code is subject to change. And change it does, often dramatically. It is crucial to be aware of proposed tax changes, their effects, and steps to take advantage of the change.
3. Avoiding Expensive Mistakes – There are two types of errors that proper tax planning can help avoid. The first mistake most people think about is “doing something wrong.” If the first mistake is “doing something wrong,” the second and more impactful mistake is “not doing something right.” An adage says, “There is nothing more expensive in life than a missed opportunity.” The primary purpose of tax planning is to be thoughtful in seizing all legitimate tax avoidance opportunities.
4. Tailoring Individual Strategy – Tax planning is most effective when done in conjunction with achieving your goals. Rather than first thinking of a tax angle, think of a life angle and then find the tax strategy to make it work. In our line of work, we advise clients, “Do not let the tax tail wag the dog!”
5. Helping Others – There are powerful tax incentives for those of us who attain great joy in helping others. Tax law is very favorable to those willing to donate to charitable causes. Likewise, less publicized techniques can help family members in a tax-advantaged way, such as providing low-interest rate loans, hiring family members, tax-free gifting, and caregiver stipends.
6. Eliminating Surprises – When appropriately done, tax planning provides the roadmap for actions needed to avoid taxes. Remember, it’s legal to do so! The steps need to be executed in the current tax year to impact the return you file next April 15th. Alliance of Comprehensive Planners members all integrate tax-focused planning with comprehensive financial planning and investment management. Being able to see the whole picture, solve for competing priorities, make informed short-term and long-term decisions, and have clients engaged in the process is a game-changer. Proper tax planning avoids the anxiety of not knowing how much tax you might owe come next April and the possibility of having a tax due without the funds to pay.
Source: Frank Corrado, CFP®, CPA, RLP, Holmdel, NJ