A successful tax reduction plan typically involves the same four steps for every person who tackles this aspect of financial planning. The rewards for taking on the financial goal of ending or reducing income taxes are substantial; wealth accumulates exponentially faster without the drag of taxes. Yet relatively few incorporate comprehensive tax planning into their overall personal and business financial planning. Whether your goals are to just reduce taxes by fine-tuning your financial plan or to completely eliminate income taxes, the steps are the same:
Step 1: Dissect and analyze to plan. Just because we use the same term “income tax” to describe this affection does not mean that we all fall under the same diagnosis. We feel the effects of different types of income taxes in different ways. A tax plan must start with an understanding of the past and a forecast of the future. We need to know what are the triggers of our own income tax. For many it is wage tax on salaries. For others, self-employment tax is the largest trigger. For others, capital gains tax is the biggest challenge. Nontaxable benefits can take the place of some taxable earned income. Tax-free stocks or death transfer rules helps us avoid some taxable capital gains. There are dozens of legal tax reducing tools available to us. All were built into the tax code for this purpose. The point is that we don’t know the strategies that will work best until we first know the tax trigger that applies to our own situation.
Step 2. Integrate tax planning with business and personal goals. Tax planning only makes sense when it integrates with other life planning. Passionate travelers, for example, build valuable tax-free travel perks into their employment agreement. Those who love fishing or farming tend to do well with tax shelters that mesh with their dreams of living at the shore or in the country, respectively. I recently helped clients leverage their passions into aquaculture and food production tax shelter businesses. I recently Each of us must select from among the available tax saving options that best fit our own life and business plans. These strategies often require significant changes to our modus operandi and so we must consider our ability to make the required changes to allow our plan be effective.
Step 3. Execute the proper paperwork and follow accounting protocols. This the dry and boring drudgery part but the reality is that tax avoidance is achieved by following the legal minutia and having the records to prove it. The devil really is in the details.
Step 4. Be ready to defend. Some tax strategies are more aggressive than others. Risks are not always understood ans accumulated wealth becomes a magnet for attack. It is essential that we learn to manage the risks of IRS audit, other government claims, natural forces, creditors, legal claims and even from ourselves. Successful tax planning includes a healthy dose of risk management.
Tax planning focuses on managing the tax risks but overall success involves the entire financial plan. Those who are most successful are the people who have learned to manage these risks.