What is a Tax Strategy?
A Tax Strategy is a sound, financial plan to help minimize your tax burden. Read this blog post to learn all about it.
You might have heard of the term, “tax strategy,” but never considered using one. Maybe just thinking about taxes makes you nervous. Simply put, tax strategies have one objective: decrease your overall tax burden.
For most investors, their focus is primarily on growth. After all, it’s their hard-earned money at stake. That is why taxes may not even be on their mind unless it’s time to pay them. “Oh, look Honey, it’s April. Time to visit Bill the CPA again. Can we just email him our stuff or do we actually have to drive there this time? Ugh.” Unfortunately, Bill the CPA may only be focused on doing your return and then going on to the next return. That is typically a CPA’s business model. But did he give you thoughts on actually paying less each year on taxes? Did he give you direction on how to reduce your taxable income? Like most investors, you might believe that taxes aren’t in your control. We are excited to tell you that may not be the case.
As a full service firm, we have partnered with a variety of professionals to bring as much value as we can to our clients. Those professionals include CPAs, Attorneys and more. We recently reached out to our partners and asked our veteran “players” for their take on tax strategy. The feedback was eye-popping and valuable. But before we get into the details, let’s answer another important question.
Who Needs a Tax Strategy?
A tax strategy is more than a wish. Wanting the tax code to be a certain way is different that actually knowing the rules. We say this because we once had a client who said she did her own taxes using TurboTax®, and because of the fact that she didn’t know the rules, she would convince herself that this is how she thought the tax code should go. That may not be the best strategy, especially if the IRS comes knocking on her door for money she still owes. Once upon a time, you may not have been making very much money and hence, you may have paid little to no taxes on your investments. Maybe you even looked forward to tax season because you got a refund. Now that you are a star performer at your firm or company, you may have entered into the six figure club. Now, taxes are more. Now, you pay the IRS at the end of the year instead of them paying you. Cutting that check to the IRS is not fun. That’s why it’s important to have a strategy to potentially ease your tax burden. Having a Tax Strategy is having a plan of action that reduces your taxable amount regardless of your investments, income and overall financial situation.
One of the many reasons people seek out experienced financial advisors is to get help with their taxes. Whether that means working with a partnered CPA, tax attorney or tax strategist, finding ways to reduce the investor’s overall tax burden is key when investing. There is no other factor more important in our opinion; not instrument, not asset class, not rate of return. Holding on to your money should be priority number one.
Working with an experienced financial advisor may give you an opportunity to develop a tax strategy that optimizes investment income. In short, a tax strategy is an ethical and moral method of paying the least amount of tax allowed by law. There is nothing “un-American” about paying less taxes. That is what makes our country great. There was even a very famous Judge of the US Appeals Court, Judge Learned Hand, who once said, “There are two systems of taxation in our country, one for the informed, and one for the uninformed.” Which category would you rather be in?
The Importance of a Tax Strategy for Investors
Tax strategies take numerous considerations into account. What is the size of your purchase or sale? What time frame are we working with? Are you a small business owner or big business owner? What are the limitations for deductions and exemptions? Are you taking depreciation? This leads us to the million-dollar question, “Why is it important to have a tax strategy?”
Besides saving you time, money and headache, a tax strategy can assist you in managing your finances in different ways. Here are the reasons why a tax strategy is crucial for investors of all ages:
1. It Prevents Errors
Having an effective tax strategy saves unnecessary errors. One of the most common issues that small business owners and investors face is they are too occupied. Payroll, marketing, legal and compliance issues all suck up time. By hiring an experienced professional, this is one opportunity to get your time back.
Since small business owners and investors are managing day-to-day tasks, they can’t focus on long-term financial planning. Long-term financial planning and retirement planning can be very complex tasks, so much in fact, that most Financial Advisors have to use software Like MoneyGuidePro® and eMoney® to aid them in that task, sometimes running something called, “Monte Carlo Simulations” to give you potential outcomes based on your different options. Without a tax plan, unnecessary errors may surface during tax season. Planing beforehand prevents tax errors such as:
- Making a significant purchase at the “wrong time.”
- Being unable to understand taxes
- Spending an unusual amount to increase potential tax deductions.
2. Decrease Tax Liability
The ultimate goal of having a tax strategy is to pay only the amount you owe and not a penny more. Regardless of your personal views, most business owners will probably agree that putting their hard-earned money into business growth is more important to them than giving it to Uncle Sam.
Most business owners we have worked with were shocked when we told them about tax deductions and other provisions. After all, if you aren’t “knee deep” in it on a daily basis and learning about new strategies that may become available, how could you possibly know how to implement these tactics? Furthermore, there is a saying in our industry, “the tax code is written in pencil, not ink,” meaning today’s tax laws may be completely different tomorrow based on who moves in to the White House. Knowing how much you are liable for and paying the exact amount required is always a good decision.
3. Better Business Decisions
Having a solid tax strategy in advance may help investors make better investment decisions and prepare for “what if” scenarios. When you look at the money “game,” understand it’s not just about making the money. You have to earn the income, invest it wisely, preserve that assets, and then take it out so it is tax advantageous. By having a strategy in place, you may be more capable of making solid decisions because you know how much you may owe to the government and can plan accordingly. Plus, tax planning may help investors understand how their business operations impact their tax obligations.
Wrapping it Up
Have a plan. Planning is key. Knowing how much money you are supposed to pay is a good financial decision. Knowing how you can pay less is an even better opportunity. However, that may be difficult without a financial consultant. A financial advisor may be able to help you navigate the “rough seas and weather” of taxes and keep your ship safe from a “sinking” government audit.
Keywords: financial advisor, financial consultant, What is a tax strategy, Importance of a tax strategy for investors
