You just got a hot tax tip. Could be from a colleague, an article you read, or a seminar you attended. You go back to your tax advisor and ask them “Can I do this?”
You’re brimming with excitement. Everybody else seems to be saving thousands of dollars with this strategy. Only your tax advisor says No. For some reason, this idea seems to work for everybody except you.
End of discussion.
This happens all the time. And it is unfortunate. Let’s be honest – there are a ton of tax strategies. And no, you won’t take advantage of every single one. Your goal is to work with an advisor who helps you choose the best mix of strategies for your situation.
That said, there are a lot of tax-saving ideas that would work for you. If you only changed your situation. That is the core essence of tax planning.
How It Works
The tax code has one little section that says all your income is taxable. The rest of the tax code contains incentives. These are the deductions, credits, and exemptions that will reduce your taxable income.
When you choose a tax strategy, you are choosing which incentives you want to participate in.
Support charitable organizations?
Own a home?
Funding your retirement?
There are deductions for that.
How about starting a business?
Hiring employees (especially specific groups of workers)?
Investing in equipment?
Researching new products or processes to make the marketplace more efficient?
There are tax incentives for all this. And it’s the tip of the iceberg.
If there are so many tax incentives to take advantage of, how come so many of them don’t work “in your situation”? When your tax advisor says that, one of the following is happening. Either they don’t know how to implement the strategy or your current situation won’t allow it.
Ask A Better Question
The better question for an advisor is not “Can I?” do something, it’s “How Can I?”
I often say every tax strategy comes with a catch. Every. Single. One.
And you have to be comfortable with that trade-off before implementing the strategy.
Think of a simple deduction like charitable contributions. There are very complex tactics involving charitable donations. But think about the simplest form. Whether you give to your church or support a non-profit organization, you’re writing them a check. Sending them money out of a pool of funds that you could have spent somewhere else.
You could have taken an extra vacation or bought your kids something great. You could have even gifted that money to a family member or friend in need. But under any of those options, you wouldn’t receive a charitable tax deduction. That’s an example of the trade-off. And it happens with every tax incentive you can think of.
Some of these trade-offs may seem small or insignificant. Like the example above. Others are more complex. They involve setting up different entities to shift and protect income. They involve crossing a lot of t’s and dotting a lot of i’s. There are decisions for you to make along the way. Documentation and justification to develop to protect you from an audit. It does take some work. And you have to decide if the trade-off (in this case, the work) is worth the extra benefit you will receive in tax savings.
An Uncommon Approach
I often approach a complex strategy with a client this way. I give them an overview or a checklist and talk about the timeline for implementation. And I tell them the major types of input I will need from them along the way. And then I tell them how much they can expect to save in taxes in a single year by implementing that strategy. Now they can make an informed decision on how they want to move forward.
But when a client asks a question, it’s almost a never straightforward “No”. Assuming the strategy they are asking about is legal and sound in the first place.
My mind instantly goes to figure out what would have to happen to make this work. Is it in their best interest? Is it a solid strategy with a defensible position under audit?
This isn’t how most tax advisor’s minds work. So even when you do ask the right questions – How Can I instead of Can I – you may still not get a good answer. And it’s not your advisor’s fault. Most tax professionals have been trained for years in a compliance-based system. Post this, balance that, fill in the forms, and file them.
But it is your fault if you don’t seek the type of advisor who will work through these strategy questions with you in a productive way. So next time you get a hot tax tip, don’t simply ask if you can do it. Ask what the trade-offs are. Ask how you can do it.
And if your advisor can’t work through that with you, perhaps it’s time to find someone who can. At the end of the day, it’s your money and your future on the line.
If you liked this post, check out our Independent Optometrist’s Guide To Financial Freedom
Eric Levenhagen, CPA CTS is the only financial consultant who helps private practice optometrists improve the financial health of their practice with a simple, proven process called Financial Harmony which will reduce their taxes and increase their after-tax profits by at least $10,000 in the first year, guaranteed.