What is a Tax Strategy?

Identifying and following a tax strategy is important for business owners, executives, and high net worth individuals that want to minimize taxes and create more wealth. Without one, you may find yourself paying extra taxes, paying taxes where you thought you didn’t need to, and having a much tighter budget than you intended for personal spending or business needs. Fortunately, the right tax plan can make preparing for and getting through tax season much easier.

Tax Strategy Explained

In a nutshell, a tax strategy should be the foundation of your financial plan implemented to reduce or eliminate taxes for a person or business. These strategies employ ethical, moral, and legal means to work within existing financial systems, such as IRS guidelines while benefitting the parties following the strategies in question.

One great example of a simple tax strategy is deciding between a regular IRA and a Roth IRA. With a regular IRA, individuals do not pay taxes on anything they contribute to the account. However, they must pay taxes on funds they withdraw from the IRA at whatever tax bracket they are in at the time of withdrawal.

In this case, they may pay more taxes on IRA funds they withdraw if they are in a higher tax bracket when they retire than when they first put the money in the account!

A Roth contribution is one tool to avoid taxes, but higher-income individuals and business owners phase out of traditional Roth contributions, and the low contribution limits don’t move the needle. Roth IRAs require individuals to pay taxes on funds deposited into the accounts. However, this means those with Roth IRAs do not have to pay taxes when they make eventual withdrawals. This could result in them saving tax money in the long run.  There are still options for high-net-worth individuals to take advantage of this tax provision.  Some 401(k) plans allow for contributions to be made to Roth and avoid the traditional income and contribution limits of individual Roth IRAs. There are options for back-door Roth contributions and other strategic tax-planning.

A 100+-year-old tool used for strategic tax-advantaged planning is high cash value life insurance.  This commonly misunderstood tool is the swiss army knife of financial planning for high-net-worth individuals, families, and businesses.  Not correlated to the stock market, when properly designed, this tool accumulates cash that can be drawn upon tax-free.

These are a couple of examples of where a strategy may provide great financial benefits to those who employ them.

The Benefits of a Good Tax Strategy

A solid tax plan can result in major benefits, especially over time. Let’s break down some of the major benefits of a quality, well-thought-out tax plan now.

Avoid Paying Unexpected High Taxes

Tax strategies may help you avoid paying unexpectedly high taxes by accident. It is hard to outearn a significant increase in tax rates.  Again, the example of a regular IRA versus a Roth IRA shows this in action. An individual with a regular IRA may be disappointed to learn that they have to pay massive taxes on their retirement withdrawals, whereas a person with a tax plan and utilization of Roth or a properly designed max value whole life plan will not have this same disappointment.

Minimize Taxes Paid in the Future

A good tax plan may also help you to minimize the taxes you have to pay in the future. Most believe they will retire in a lower tax bracket.  Assuming tax rates do not go up or change, most of your deductions used during the earning years, I.E. child credits, mortgage interest deductions, charitable giving, etc., are diminished or reduced when taking retirement income.  Most importantly, if you properly save, do you really want to have less income when you have time to enjoy it the most.  The early retirement years, for many, can be the most expensive as travel, second homes, and increased social events all become more appealing with newfound time.

Balance Tax Requirements with Spending Needs

Taxes are a necessary part of life, but it can be tough to juggle tax savings and payments against spending the money you earn for immediate needs or desires. Tax strategies can help you to balance the requirements for smart saving with spending or purchases, especially when it comes to buying expensive things like houses or cars.  Any time a pre-tax investment vehicle is used, you are kicking the can down the road.  The taxes are still due, you are merely deferring them to a point in time later when you have no idea what the tax rate may be.

Make the Most of a Personal or Business Budget

Ultimately, everyone should look into developing a tax strategy for their finances ASAP – the sooner you begin planning for your taxes, the bigger the benefits you may see!

If you are interested in wealth management and wealth creation and have questions about how a tax strategy can help you achieve your financial goals, contact Prevail to schedule some time to talk with an advisor.

Frequently Asked Questions

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Andrew Stafford

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