Greater Seattle, WA: Four Options to Pay Less Tax

Especially during these last few days leading up to the tax filing deadline, we receive calls from prospective customers asking about how to pay less tax.  There may be thousands of specific strategies to reduce the amount of tax you pay; however, you can generally collect them into four buckets.  As a boutique practice that focuses on tax planning and taxpayer representation, here are the four methods that we use when helping our customers pay less tax:

1.      Shifting – It is no secret that not everyone pays the same amount of tax each year.  Depending on your company’s entity structure, other income sources and various other circumstances, the tax rates applicable to your income change.  With proper planning and documentation, you can choose what individual and what company owns the income subject to tax.  This can also be a powerful planning method to provide financial support for others who may be in a lower tax bracket than you.

2.      Timing – The cliché, “timing is everything,” has a place in tax planning too.  For example, if you structure a sale at year-end, but receive payment in two or more payments, one in December, the others in the following January and beyond, then you have effectively moved part of the tax burden into a different year, while your lifestyle is unchanged.  Similar strategies can be used with retirement account planning, charitable giving, and many more.  Controlling terms when a major event happens can be very powerful when planning how much tax you are willing to pay.

3.      Code – Use the opportunities within the tax code to your advantage.  Do you need to subject all your income to self-employment tax?  What about the “Augusta Rule”?  Are you maximizing your vehicle and business use of home deductions for the administrative office?  Qualified plans are not just for retirement, do you have unreimbursed medical expenses that could be considered a benefit expense to your business?  As complex as the tax code is, when you work with professionals who can decipher it, you can realize the opportunities to pay less tax.

4.      Products – Not all cash received is treated equally for tax purposes.  Wages and most earned income are taxed using the ordinary income tax rates.  Sales of appreciated investment property are taxed using the preferred capital gains tax rates.  Loan proceeds are generally not taxable at all.  What if the loan proceeds were related to a dividend paying investment product like life insurance?  Sounds like an opportunity for a tax-free retirement plan like a Roth IRA, but without the low contribution and income limits.  What if you had access to both?  Financial products can seem complex and a bit intimidating; however, when used in conjunction with a comprehensive personal plan, they can help reduce the amount of tax you pay.

There you have it, seems simple enough, right?  As with many technical areas, the devil is in the details.  When evaluating strategies that are specific to your circumstances, take a moment to think about how you will accomplish paying less tax.  My bet is that the strategy you are considering will fall into one of the buckets outlined above.

To learn more about tax-saving strategies for business owners, or get help with an IRS tax problem, contact me at (360) 474-5892 or e-mail me at tate@ensigncpa.com.