As a country, we are in a financial condition that requires increased tax revenue, and this upward pressure on taxes is not going to go away soon, and the political winds are blowing strongly in that direction. Recently, legislation was introduced (but not passed yet) to extend Social Security taxes on high income earners (above $118,000) and to add Social Security taxes on investment income (which has never been done before). The door for Social Security taxes on investment income was first opened with the Affordable Care Act (Obamacare) where for the first time in history there was a new Medicare tax on investment income (before, there was only a Medicare tax on earned income).
If you are a tax payer who desires to pay your “fair share” but nothing more, you should be aware of many underutilized tax strategies available under the Internal Revenue Code. The purpose of this article is not to provide an exhaustive list of such strategies, but a sampling of strategies in order to provide hope for “a better day”.
Below are a few tax reduction strategies under the three categories of earned income taxes, investment taxes and estate taxes. The information provided should not be considered tax, legal or financial advice, but simply financial education in order to help empower you to make more informed decisions.
Strategies for reducing earned income taxes
If you are a business owner that has excess profit in your business greater than your lifestyle expenses, then you may want to be aware of one or more of the following strategies:
· Administrative Services Company with Employee Stock Ownership Trust
o This strategy is designed for small and large business owners and it effectively eliminates 100% of income taxes on excess income above your lifestyle expenses.
· Micro-Captive Reinsurance Company
o This strategy is designed for businesses with less than $2,200,000 of profit, and it effectively eliminates 100% of income taxes on excess income above your lifestyle expenses.
· Employee Stock Ownership Plan
o This strategy converts your business into a tax-exempt entity (qualified plan), eliminating all business income tax, making your company more competitive.
If you are not a business owner, but still earn a good income, another easy but underutilized strategy is using solar tax credit partnerships. This strategy does not eliminate income taxes, but it can reduce income taxes owed by about 35% to 45% per year.
Investment Taxes
As mentioned earlier, taxes on investment or passive income are most likely to increase in the future. With that in mind, one of the most underutilized assets investors may want to consider is a type of guaranteed indexed account called indexed universal life, or IUL. Many investors are surprised to learn that IUL (done correctly) has lower expenses than traditional assets, has had a higher return than the stock market historically (with no stock market risk) and is tax very favorably (similar to a Roth IRA). For high income earners, Roth IRAs may not be available or have low contribution limits. With IUL, there are no IRS income limits and no IRS contribution limits.
Estate Taxes
For high-net-worth families, the estate tax could be devastating. However, with proper planning, this tax can be reduced or eliminated. Some simple planning techniques to accomplish this include using your lifetime gift tax exemption, family limited partnerships, and irrevocable trusts.
If you would like to learn more about these and other tax reduction strategies, you may schedule a complimentary tax review meeting with an Independent Advisor below.
