How Do I Practically Reduce My Tax Liability?

How Do I Practically Reduce My Tax Liability?  Legitimately!

Introduction:
    The tax code is amazingly complex, and becomes more complex with every new law, revision and technical corrections act.  When a politician wants to make points with his district, he will often schedule a news conference and roll in the tax code on two wheel carts, position it in huge stacks around the microphone, and then assail the code as though it were some type of cosmic accident that just occurred, an incurable evil that must be dealt with, or at the very least, simplified.  And then of course the news conference is over, the sound bites are recorded, and the newsletter is published assuring the voter district that he or she is on the job of reducing their taxes and making their lives easier.

    And nothing happens.  Why?  As you read in the introduction to the code, and the philosophy behind the code, we have a national preoccupation with tinkering with our societal challenges through the use of tax incentives, exclusions, and benefits.  Some are good policy.  Some are negotiated by lobbyists.  And some are so much a part of our national fabric that we cannot displace them without ruining our tapestry.

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Unfortunately, though the tax code treats everyone the same, not everyone has the same result.  Why?  Our ability to appropriate this information is not equal.  Some may argue that the code does not in fact treat every person or every business the same.  It is interesting rhetoric, but the truth stands the supposition on its head.  The same rule that applies to IBM or General Motors applies to the local mom and pop business.  The same code that defines income and exclusions for Bill Gates, defines income and exclusions for John Q. Public.  

      The problem is not with the law, but with the appropriation of the law.  
      
      The larger corporations have tax counsel.  Mom and Pop shops do their own returns on the new tax software. 
     
      Wealthy people look forward, and modify their structure and transactions and decisions based on the tax outcome.  John Q. Public looks backward, generally thinking about taxes when it is time to file and collect the interest free loan he made to Uncle Sam. 
     
      The wealthy understand that some income is excluded from tax, and other income may be acquired in a manner that postpones a taxable event until a later time, allowing the base of wealth to grow faster and unencumbered with current erosion from tax payments.  John Q. Public is so accustomed to living in the moment; he seems to structure his affairs to pay the most tax at the worst time, with little consideration given to the accumulation of wealth.

    If there was ever truth contained in the statement that knowledge is power, it is absolutely true in this matter of appropriation of rights under the IRC.  We recently executed a retainer to provide financial architecture to a gentleman with six different businesses that was paying over $120,000 in tax per year.  He had been to three different tax preparation firms, and was ready to shift to a fourth.  He was so frustrated he was speaking with a trembling voice.

    The bad news; Nearly everything he had done was the opposite of what he should have done to reduce his current tax liability and build his wealth.  The Good news:  It is all able to be addressed.  It is likely he will pay less then half his traditional tax burden by cooperating with Congress and the benefits under the tax law.  Is it fair?  The code applies equally to every tax payer.  The appropriation of the code is not applied equally.

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    This series of articles will not make you an expert on the tax code.  It will however provide you with a basic insight into the structure of the code so that you can begin to look forward, and understand that some decisions will have a positive effect, and others will have a very negative effect. 

      Hopefully, this knowledge will open your eyes to the many opportunities legitimately available under the code to reduce your tax and increase your wealth.  As hard as it may be to believe, the tax code, with all of its complexity and historical baggage, actually does work in promoting a certain social policy.  While we individually may not always agree with the policy it is promoting, or the long term effects sponsored by the implementation of the policy, we can always agree on one thing; This approach to taxation creates opportunity to build wealth.

The Big Picture:

    Congress has designed the IRC to be responsive to fiscal policy, lobbyists, and solving national and local challenges.  To this end, we will study several areas to get a sense of what the IRC allows, and what problem or challenge is the focus of such machinations.

Exclusions:
      Congress has determined that certain types of income shall not be taxed.  Simple as that.  Sometimes these rules apply to all tax payers, sometimes just to formally formed businesses, and sometimes to NPO (non-profit organizations).  Sometimes it applies only to a specific occupation.  I.e.  Those in the military, ministry, or involved in agriculture.
     
      A prudent wealth builder would certainly want access to this list of incomes excluded from taxation in order to orchestrate their affairs to legitimately appropriate some of these benefits.
     
      Here are some examples:
      Certain types of municipal bond interest.
      A return of costs incurred.
      Payment for sickness.
      Certain grants or scholarships
      Value of improvements made in property
      Discounts on certain customary purchases
      Certain fringe benefits.
     
      What do we do in response to this?  We pay careful attention, year to year to the list, and where possible, appropriate the benefit to our situation.  What difference does it make? 
     
      Think of it this way.  If I pay for a benefit with after tax dollars that could have been acquired as an excluded benefit, the difference is dramatic.  Suppose I am entitled to a fringe benefit that costs $1000 a year to procure.  If I am in the combined state and federal tax bracket of 40%, and I pay for this benefit with after tax dollars, I must earn $1400, pay the tax and then acquire the benefit.
     
      In order to appropriate the benefit, I must follow the rules of documentation, and pre-planning, but if I do, there are a number of excluded items that may be worth acquiring:
     
      Non-taxable remuneration:
     
* Hospitalization Insurance Premiums
* Group Life Insurance Premiums with certain limits.
* Group Legal services.
* Accidental death and or dismemberment benefits if not computed as a function of missing work.
* Certain holiday merchandise from employer
* Reimbursement of expenses incurred on behalf of employer.
* Meals and lodging provided for the convenience of the employer.
* Discounts from employer that are considered minor
* Worker's compensation
* A choice of certain benefits available under a non-discriminatory cafeteria benefit plan.
* Dependent care assistance
* Employer educational assistance programs
* Gifts, bequests and inheritances.  (The donor may have to pay a gift tax, but not the recipient.)
* Interest on state and municipal debt obligations
* Public assistance
* Social Security and RR benefits subject to certain limitations
* Annuity payments that are a return of principal
* Proceeds from the sale of your principle residence
* Car pool receipts
* Certain damages and awards
* Life insurance proceeds
* Certain qualified state tuition programs

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Does this list create opportunity?  Of course.  And a wise person or businessperson will look for methodologies to avail their affairs of these benefits to receive the income that is excluded from taxation.

Next Article:  Credits Pay Your Tax!  Know Your Credits.

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