If there’s one thing that I learned from my time at the IRS, it’s that if you do not want to pay taxes, you should be smart about not paying taxes. The tax code is so complicated, and changes so frequently, that the most I can really do here is give you an idea of what to look out for as signals that you should consult a professional to check for opportunities.
Good tax planning is exactly that: planning. It happens before land is sold, before you die, before you reach a certain age, before you decide on how to form your business. Tax planning is also something that provides an enormous cost to benefit ratio–it’s very common for the savings to be a hundred times or more the cost of the tax planning.
On the downside, it’s very difficult for most people to recognize that an opportunity to save on their taxes even exists. Even a lawyer or accountant will not spot every opportunity. Part of the reason the cost of the advice is so cheap is because a professional might spot something you did not, explain it in a few minutes, and save you thousands. Thus, the real question becomes, how do you know when to start asking these questions?
In the United States, the main taxes we pay are income tax (money we make off working), capital gains tax (selling assets like land or stock), sales tax (buying stuff), and the estate tax (dying). Simple, right?
The Inflexible Stuff
Most salaried employees are paid on W2 by an employer who is unrelated to them. Paying taxes on that income when it first gets to you is pretty difficult to avoid, aside from the obvious, like claiming your children as dependents, or reporting large healthcare bills. Sales tax is also difficult to avoid, other than buying your products online. Thus, for that income, there’s usually not much to work with, and to me, are not the prime candidates for knocking on the accountant’s door.
Everything else has flexibility. Running your own business? Planning on dying with a lot of money? Investing in land or stocks or annuities or life insurance or another business? Thinking of selling any valuable assets? In short, making any money that’s not part of your employer’s W2?
If that’s the case, then call a tax lawyer or accountant. The chance that you’re going to get what you paid for in terms of a consultation is very high.
Tax Avoidance Is For Everyone!
Have you ever bought something online to avoid sales tax? Did you enjoy saving $70 on your thousand dollar television while shopping in your underwear? Then congratulations, you are already an experienced tax avoider!
The most dangerous thing to do is to try to avoid taxes without the assistance of an accountant or lawyer. While I was at the IRS, I noticed that a lot of people could have legally paid less in taxes if they had planned a little better, rather than trying to stick it to the government in a haphazard, ill-thought-out way. Metaphorically speaking, many people would sooner skip reporting $70 of income on their taxes than buy that thousand dollar television online. There’s frequently both a legal and illegal path to get to the same tax result, and often only an accountant or tax lawyer can tell the difference.
Tax Is Also Absurdly Complex
Even though taxation was my focus in law school, and I interned at the Internal Revenue Service, every tax question feels like a brand new set of instructions for IKEA furniture–a constant reminder of just how complex this is, and the reason you should avoid doing all of it on your own. As with all things in lawyerdom, it is a good idea to research the topic yourself–sometimes all you need is the lawyer to double check your own plan. In my experience, this is always a good idea. My most creative, smart, and educated clients, who have come up with things I never would have, are rarely able to spot every landmine. If you have already done most of the work, then the professional double checking your plans will not have much to bill for, and still give you the sense of security that everything is on the up and up.
This all sounds simple, but many pay thousands or hundreds of thousands in tax that’s entirely avoidable. The key takeaway points:
1. Talk to a tax lawyer or accountant before you commit to something that tends to give opportunities for tax avoidance, such as:
- Starting or investing in a business
- Buying assets you intend to sell later, such as land, or stocks
- Selling those same assets
- Buying assets that pay out eventually, like annuities or life insurance
- Lastly, although this isn’t always easy to predict, before dying with a lot of money
2. Do not be afraid to research your own tax planning strategies online and through books, but have them filed and/or checked out by an accountant or lawyer. Frequently, the IRS imposes rules, through regulations or guidance opinions, that make minor changes to tax planning strategies you might see in Forbes magazine that are only a year or two old. The IRS does this a lot, particularly when a tax strategy achieves popularity, as it usually has by the time you hear about it.
3. Tax planning is just part of the reason it’s a good idea to ask a lawyer about major transactions with components you have not seen before. You’re never wasting your money to talk to a lawyer for an hour about a new business venture or big transaction, even if they do not have an amazing tax strategy you have not heard about. Lawyers and accountants have businesses and clients like you, all the time, and they often are in a great position just to give general advice. If a transaction ever feels weird or makes you queasy, call a lawyer! They are not just there to tell you if something is legal or not, or to write contracts–they are there because they have seen people in your situation many times before.