Tax Mastery

Tax Mastery Fundamentals

At ProVision, we have learned the secrets to permanent tax savings for business owners and investors. It all begins with understanding how the tax law works. Our education includes years and years of formal education and many years of practical education. In addition, we apply all of the principals we have learned in our own business and investing.

We have spent literally thousands of hours studying the Internal Revenue Code and its regulations and court cases. While it would be impractical to share all of this information on a website, there are some fundamentals that we are happy to share that can help you minimize your income taxes. To begin with, there are three basic principals that will help you understand all of the tax laws.

1. Purpose of Tax System is to Encourage Investment: The United States tax system is not meant solely to raise revenue for the U.S. Treasury. It is also used to affect public policy. It does so by providing certain benefits for some activities and penalties for other activities. There are benefits for investing in agriculture to spur local production of food products. There are incentives for domestic oil and gas producers to encourage the production of our natural resources locally. There are incentives for charitable giving, to encourage individuals to donate resources to public and private charities. There are also incentives for real estate investors to encourage investors to provide housing. And of course, there are multiple incentives for businesses that encourage expansion of business and employment. Remember - Taking advantage of these incentives is simply doing what the government wants you to do.



2. Integration of Tax System: The United States tax system is an "integrated" system. One part of the law can affect and is affected by other parts of the law. The result is an extremely complex system that requires years of study to master and which is rarely mastered by even so-called "experts." However, the result to those who do understand the law is a vast opportunity to apply rules of the law to their tax situation to obtain the maximum benefits allowed by law. At Wealth Strategy U, we have simplified the tax law so you can understand it and, with the proper advisors, you can use it to your benefit.



3. Deferral vs. Permanent Savings: There are two major categories of tax planning under the Internal Revenue Code, DEFERRAL and permanent.
   

Deferral: Deferral simply means paying your taxes in a later year. DEFERRAL DOES NOT CREATE A PERMANENT TAX REDUCTION. Deferral is the most common type of tax planning. Included in this category are pension and profit sharing plans, 401(k) plans, regular IRA's, paying expenses early, and waiting to receive income until a later year. Over 95% of the income tax planning done in the U.S. is deferral.

The problem with deferral is that eventually YOU HAVE TO PAY THE TAX. And often, you pay the tax at HIGHER RATES. Let's look at an example to see how this works.

Suppose you put $10,000 into a 401(k) plan during the year. You will get a deduction for this on your current-year tax return. The income earned by this investment (assuming it the investment makes money) is not taxed until you take the money out. On the surface, this sounds great. But when we look at it closely, this might not be a good deal at all for you. Why not?

First of all, most members of WSU do not want to retire poor. Typically, our members want to retire rich. This means that you will probably be in a higher tax bracket when you retire then you are when you earned the money. You won't have all of the deductions that you had while you were working (business, children, home interest).

Second of all, some of the income from that investment probably will be in the form of dividends or capital gains. These have a much lower rate of tax when earned OUTSIDE of a 401(k) plan, but are taxed at your HIGHEST STANDARD RATE when earned inside a 401(k) plan.

Third, you do not have total control of your money. Who controls when the money can be taken out? THE GOVERNMENT. Who controls what investments you can make in a 401(k)? THE GOVERNMENT. And who controls how much leverage you can use with the investment? THE GOVERNMENT.

Permanent: While 95% of tax planning in the U.S. may be deferral, that does not mean this is the only or the best type of tax planning. It's just the easiest. Most of us would rather never have to pay the tax instead of just putting off the tax to a later, high-income year. There are many amazing opportunities for permanent tax planning, but all of them take knowledge and innovation. Let's look at a few.

First, there are those tax benefits that come from lowering your tax rate. There are many types of income that have preferred tax rates. These include long-term capital gains and dividends. And there are ways to reduce your tax rate as well through the use of C corporations and trusts. Or you might be able to take advantage of your children's lower tax bracket. See more on using your children in your tax planning.

Next, there are those types of income that are never taxable. Roth IRA's or Roth 401(k) plans are included in this category. While you don't get a deduction the year you contribute, the income earned is never taxable. Another example is tax-exempt bond interest.

Then there are those expenses that are normally not deductible, that if legitimately paid for by a business become deductible. This could include meals and entertainment expenses, travel expenses and home office expenses. With proper planning, these deductions result in permanent tax savings. More on deducting travel, meals and entertainment.

Now that you understand the basics of good tax planning, you are ready to continue on with your Tax Mastery. We recommend that you begin with the Tax Strategy Fundamentals.