Taxes are Taxing
By Paul Morrone, CFP®, CPA/PFS, MSA
With taxes being one of the biggest expenses that any household pays overtime, you’d think there would be a greater level of education about how taxes are assessed and paid, but unfortunately there isn’t. Even the most basic concept of withholding vs tax paid or refund vs balance due is a quagmire for most Americans. Before we go any further, please let me say that the following comments are not designed to be political in any way, shape, or form. I’m writing this in the wake of the recent NY times article which dissects President Trump’s tax returns and I now have more questions than answers. As a financial professional and CPA, I’m not wondering about the complexities of the President’s finances, how much tax he paid, if he wrote off his haircuts or what type of income he generates from Russia. I’m wondering how, overnight, seemingly every American with a keyboard or smartphone has become an expert in the area of taxation. And not just your basic income tax, but the complex areas of executive compensation, passive activity losses, NOLs, foreign source income and business entity structure. Many have also managed to accumulate this vast and specialized knowledge, critically assess it, then, opine on it, without even seeing a page of the 1040 on which their comments are based. Am I the only one that is confused?
I’m only half joking, but if you scroll through the myriad of social media posts that we’ve seen over the years about the President’s tax returns, tax policy changes, or the Tax Cuts and Jobs Act of 2018, it just further magnifies the general lack of knowledge about how our current tax system works. I’m not saying that every American should be qualified to be the head of complex tax matters at a Big 4 accounting firm, but a basic understanding of taxation is necessary for even the smallest taxpayer (and arguably more so as they may be missing valuable tax credits available to lower income households!). At the very least, taxpayers should be seeing qualified advice that is relevant to their personal situation, which does not mean googling the ‘top 10 tax saving tips.’ A qualified advisor who is well versed in personal taxation will take the time to get to understand your tax status and, more importantly, what your goals are. If you’re currently working with an advisor who does not engage you in tax planning, I think you know what my next recommendation will be.
With such a sizeable amount of our resources being allocated to taxes over a lifetime, it only reinforces the need to plan for them accordingly. Most taxpayers feel that their responsibility is to make sure they have filed a complete and accurate tax return by April 15th. Period. While technically, this is a valid statement and will do the minimum to keep you in compliance with the law, from a proactive planning standpoint I’d argue that you are shooting yourself in the foot. Planning for and mitigating taxes is a best practice for any taxpayer, no matter how large or small. Whether you agree or disagree with the structure of our tax code is a different issue – and I’m not willing to take on that philosophical argument right now – but I have yet to meet an individual who willingly wants to give more money to the IRS than they have to, no matter what they say on Facebook.
As with any planning engagement, we see the largest return on our efforts when we control the variables over which we can exercise the most influence. Tax planning is one of those areas. While the rates and rules are dictated by our tax code, we often have the flexibility to control how income reaches our tax return and the timing of major taxable events. In most cases, it is possible to control how much money we direct to tax deferred savings options, the amount of passive income that our investments generate, when gains or losses are realized, the amount of charitable contributions made or the timing of retirement plan distributions. Additional forms of tax planning include creating a strategy to create a tax efficient estate and distribution plan for your heirs.
Because taxes influence nearly every part of an individual’s financial household, from their take home pay, to the net return on their investments, to their estate plan, it’s hard to understand why it is not a focus for many people. Strategic tax planning may not yield home run results each year but staying informed and making tactical decisions over time can certainly help generate tax alpha in your overall financial plan over time. If the saying is true that the only two guarantees in life are death and taxes, why not make at least one of them a little less painful?
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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