Taxes are the greatest cost to building your wealth. By taking a proactive approach that aligns with your goals and needs, VCM specializes in assisting you to reduce your tax liability now and in the future. At VCM, we pride ourselves on thinking outside the box but within the framework. What do I mean by that? It’s simple. We believe it is important to think of creative solutions that are outside the box without sacrificing principles or regulations (including, but not limited to IRS regulations).
It is that mentality that has made tax planning our specialty. Unfortunately, some of the tax planning that is being done either crosses the line or gets way too close to the line when it comes to what is allowable with the IRS. You see, I believe that with the right knowledge and planning, there shouldn’t be a need to take on significant tax risks to save a lot in taxes.
Tax Planning is Not Retirement Planning
You know that saying, “a square is a rectangle, but a rectangle is not necessarily a square? Well that’s kind of what we’re talking about here. Proper retirement planning involves heavy tax planning but tax planning doesn’t have to heavily involve retirement planning. Okay, the metaphor might not exactly fit, but you get the idea. The point is, the two really are different.
Where many people, even the majority of advisers and accountants, get confused, is with the fact that about 50% of good tax planning strategies involves vehicles that are intended for retirement. Although we may use these so called “retirement vehicles”, the purpose doesn’t have to necessarily be for retirement. It can also be used to help you accomplish your short-term goals.
Here’s where thinking outside the box comes in handy. You see, we don’t care what somethings general purpose is; we care how it can help us serve our needs and goals. The Solo 401(k) is a great example of this. It is traditionally a retirement vehicle. The IRS gives us tremendous tax benefits within 401(k) plans to encourage our society to save for retirement. Yet, with proper planning, they can help us throughout our life, not just for retirement.
Guidelines for Effective Tax Planning
Here are our 7 rules for effective tax planning:
- Current Needs & Goals
Your current needs and goals must be prioritized. For example, if an option interferes with your business goals, then it should likely be immediately set aside.
- Future Needs & Goals
It’s easy to consider your short-term needs & goals; yet having a vision of the future is important too. This helps us to avoid costly mistakes.
- Current Year Tax Savings
This is simple, how much will this option save you on taxes this year? What about option B? And so on…
- Lifetime Tax Savings
This is where it gets trickier. One must be careful not to save money on taxes this year, just to pay more down the road. Conversely, we may be willing to pay more taxes this year if it means greater lifetime tax savings. The concept of opportunity cost and time value of money becomes very important here. Estate taxes, when applicable, should also be considered within lifetime tax savings.
- Liquidity Needs
For some, this is the most important factor. How much liquidity do you need? This may be for an emergency, for your emergency, possible investments, or just for reserves. Sometimes we’re willing to sacrifice some or all liquidity for tax savings. Generally speaking with the tax planning that I like to do, I always favor achieving the most tax savings while maintaining the most possible liquidity. This is especially true for business owners and entrepreneurs.
While sometimes we simply accept that we may lose a certain amount of flexibility with our future decisions, we will always place an emphasis on options that provide optimal flexibility in future years. In other situations, maintaining flexibility becomes non-negotiable. This flexibility comes down to what are the options/costs if circumstances change to require change in the strategy, or even make it non-viable altogether.
- Income & Tax Control
With added flexibility comes greater control. However, I do separate the two because I want to place a greater emphasis on how an option may give us greater control over our income. Often times this control over our income or deductions can allow us to realize significant tax savings throughout our lifetime. This isn’t just in terms of how much in deductions we’re taking, but also when we’re doing it. With proper tax planning, we’re not just thinking about this year. We’re also looking at the big picture to save the most money overall.
Contact us today to learn how our tax planning services can assist you to achieve your goals faster and more efficiently.