The goal of any good tax plan is to arrange your legal and financial affairs so as to minimize your tax burden. At Ourednik Law Offices, our attorneys are educated to be skilled tax planners from day one because every Ourednik Law Offices attorney possesses a Masters degree in Tax Law. Many attorneys are simply unprepared to navigate the complicated provisions on the Internal Revenue Code and Regulations.
This is not the case at Ourednik Law Offices. Whether the issue is local, state, or federal taxation, we are prepared to accomplish your goals with an eye towards careful tax planning. Contact Ourednik Law Offices today to see how we can put your ideas to work without any tax surprises.
What is tax planning?
Sometimes people wonder just exactly what encompasses tax planning. To properly understand the issue, it is important to differentiate between several commonly recognized methods of minimizing taxes.
Tax avoidance generally utilizes methods to modify a taxpayers financial situation in order to lower the amount of income tax owed. Tax avoidance is most commonly accomplished through familiar legal methods such as permissible deductions and credits. Many taxpayers count on some form of tax avoidance, such as taking a credit for child care or making a contribution to their retirement account, to reduce their tax burden every year. Tax avoidance can also be accomplished though illegal methods, such as contrived accounting structures and abusive strategies that target loopholes in order to claim impermissible tax deductions or take advantage of a tax benefit in a manner that it was never meant to be used. However, strategies that utilize methods such as these can lead to serious civil and criminal consequences and should not be considered a valid method of reducing taxes.
Tax evasion is an illegal practice whereby a taxpayer intentionally avoids paying their true tax liability. Tax evaders will deliberately try to hide income from the authorities by various methods such as secret offshore bank accounts, undocumented cash transactions, and fraudulent financial records. Taxpayers who are caught evading taxes are generally subject to criminal charges and substantial penalties.
Tax planning is the overall analysis of any given situation with an emphasis on tax perspective. If done properly, tax planning allows the other elements of a financial plan to produce income more effectively, primarily through minimal tax liability. Tax avoidance is one part of tax planning, however there can be many others, a few of which are described below. Tax planning is best accomplishing by consulting with various professionals who are knowledgeable in fields such as tax law, financial planning, and accounting.
There are many perfectly legal ways to increase one’s wealth in a tax efficient manner without resorting to illegal activity and some of these methods are very powerful. When it comes to seeking the services of a tax planning expert, it is prudent to recall the classic advice that “if it sounds too good to be true, it probably is.”
Beware of individuals that promise outlandish tax savings for little to no cost or effort on the part of the taxpayer. Similarly, those who claim to know a “secret” that can save a person taxes may be practicing illicit behavior. In reality, it is difficult to imagine the existence of a truly “secret” tax strategy, since the laws, rulings, and court cases that make up the body of modern tax knowledge are readily available to the public. Taxpayers attempting to take advantage of exotic tax saving procedures may find themselves on the wrong end of a dispute with the IRS.
What are some basic tax planning strategies that could be valuable for my situation?
Contrary to popular belief, effective tax planning is not a tool only for the “super rich”. There are many tax planning opportunities available for all taxpayers who meet the proper circumstances. Some of which include:
- Proper tax timing – Determining when to recognizing gain or loss, when to pay expenses, or when to report income is an essential part of any tax plan. The general rule is that deductions or credits should be taken as soon as possible while the recognition of income is to be deferred as long as the law will allow. A qualified tax professional should always consider matters of timing when implementing any tax plan.
- Selecting the right investments and retirement plan – Many people are familiar with the preferential tax treatment afforded long term capital gains on investments. However, what may not be as well understood is that these preferential rates can vary depending upon the asset class as well as the personal income tax bracket of the taxpayer. Likewise, with retirement plans, the tax consequences of each plan will vary. Some, such as a 401(k) or standard IRA, allow for years of tax deferral. Others, such as a Roth IRA, provide for near tax elimination. Some plans have strict contribution limits, while others can be more flexible. All of these issues are matters to be discussed with a tax planning professional.
- Choosing the right business structure – No one wants to pay taxes twice! That is why it is essential to select the proper business entity for the circumstances. For some corporations in the United States, taxes may be levied on income at the corporate level and then again to individuals when dividends are paid. This is why many small businesses are structured as pass-through entities such as partnerships, LLCs, and S corporations so that any income is taxed only once on the individual owners of the business. A tax professional can help select the proper entity and then advise on how the individual members may wish to govern tax matters between themselves.
These are just a few basic issues to consider when engaging in effective tax planning. A knowledgeable tax attorney will be able to explain these, as well as more complicated options to their client, and then take steps to implement the strategies that are chosen. These options may lead to significant tax savings that can be used to retire comfortably, grow a business, or even support a family for generations. This is the role of the tax attorney and the value they bring to any situation.