Tax season for most CPAs begins in January and ends April 15th. Businesses and individuals have received most of their W-2s, 1099s and other required documentation, and have gathered receipts, bank statements and other financial documents into a box, or an electronic file, and shipped it off to (some accountants would quip “dumped it on”) their accountant.
Now the fun begins, as the calculations are done and gaps appear between the expected tax bill and the actual amount owed. Squawks will echo up and down the land as the truth hits home and unexpectedly large checks are written. What makes the damage worse is that, with proper planning the previous year, a good chuck of the tax bill could have been avoided.
Too many businesses, smaller outfits in particular, are too busy running their business to tax plan. And good CPAs have a lot of clients, so keeping on top of every page of a 75,000 page tax code makes effective tax planning for each client harder. The result? A tax bill that can ruin a perfectly fine Spring.
The Endless Search for Lower Tax Obligations
Jean-Baptiste Colbert, the French economist and Minister of Finance under King Louis XIV said “the art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.”
Many of us might also agree with Will Rogers when he cracked, “The difference between death and taxes is death doesn’t get worse every time Congress meets.”
Taxes are both annoying, and necessary. Governments cannot run without that revenue. But, there is no law that says you must tip the IRS: You don’t have to play the role of the Plucked Goose. The government allows us the freedom to arrange our financial affairs in ways that take advantage of the tax benefits created for us by Congress. And this gives great hope: You don’t have to pay all the taxes you may think you have to pay. You have choices!
Take in the whole picture
April is all about income taxation, but taxes are woven into every aspect of our lives. Think about the Building permit tax, capital gains tax, “sin taxes” on alcohol and cigarettes, unemployment insurance tax, Social Security and Medicare taxes, fishing license tax, gasoline tax, the gift tax, IRS penalties (tax on top of tax), property tax, sales tax, telephone excise tax, traffic fines (indirect tax), inheritance tax, utility tax, vehicle license registration tax, workers’ compensation tax…and on and on and on.
Effective tax planning must take all these obligations into account, then identify the laws, which are often hidden within reams of legislative double-speak and gobbledygook, that benefit you. The IRS is not going to voluntarily put neon lights and spotlights on the obscure bits of tax code benefits, as it is in the business of plucking geese. But Congress has passed them into law, and they are available to help you keep more feathers on your goose.
Let’s review just one example of how melding tax laws unlocks tax benefits:
Rita was a 68-year-old owner of a 10-unit apartment building. She had owned the apartments for more than a decade and lived in one of the units for 26 years. The property sold for $825,000. By combining three different tax laws, she was able to personally capture 10% of the sale tax-free netting about $78,000 at close of escrow. The remaining 90% was sold in a way that allowed her to solve the $120,000 tax problem, protect an additional $680,000 in net sales proceeds and dramatically increase her income from $21,400 to over $70,000 annually.
A seasoned tax planner is like a chemist who takes known elements and compounds, mixes them together, and creates a new medicine to heal an ailment. The tax planner takes the time to understand the client’s entire financial position, then meshes different tax laws to legally gain a more favorable tax treatment for his client.
Most critically, plan ahead: Give yourself time to thoroughly investigate all the options available to you and do not jump at the first tax solution you hear about because you are in hurry. You must also leave enough time to validate any solution with independent tax authority. This methodical “check and balance” approach to tax planning will position you to confidently implement the most profitable solution, and only when you are ready. You will also sleep more comfortably at night knowing that you made an informed decision based on objective and unbiased information, well in advance of tax day.