Updated Jan 17, 2023
It’s that time of year again–taxes! In order to avoid paying more taxes than necessary, you should hire a professional tax expert. In all likelihood, you are missing out on tax savings because of the complicated and ever-changing tax code. There are several ways a tax professional can help.
8 Reasons it Pays to Work with an Expert on Tax Strategies
- Protect Your Estate
- Using Trusts
- Year-Long Tax Planning
- Save Time
- Represent You in Case of an Audit
- Constantly Changing Tax Code
- Business Taxes
- Tax Debt
It’s difficult to decipher the difference between tax evasion strategies and tax avoidance strategies. Tax evasion is illegal and includes activities such as failing to report income or faking business expenses. On the other hand, tax avoidance is legal and allows taxpayers to seek all eligible adjustments, deductions, and credits. Due to the complex nature of the Internal Revenue Code (IRC), you may want to seek the advice of an expert tax lawyer.
1. Protect Your Estate
Discussing your tax strategy with a tax professional can help protect your estate from excessive tax liability. Just because you have less than the official estate and gift tax limit of $11.4 million doesn’t mean your beneficiaries will receive all of that estate. Without proper estate tax planning strategies in place, many high-net-worth individuals may have their estate subject to a state estate tax upwards of 16%.
There are other various complications that change yearly. These changes can alter even the best tax strategies, particularly when it comes to your estate and end of life planning. The most advantageous tax reduction strategies for high-income earners take time to design and fully employ. The proper professional tax expert will help you decide whether an aggressive approach is right for you, as well as how to employ a variety of additional advanced tax strategies.
2. Using Trusts
Many advanced tax strategies are only achievable with help from a professional tax expert. Funneling your whole-life insurance into a protected continuing trust means that when you or your surviving spouse dies, your life insurance proceeds are protected from creditors or future divorcing spouses. But these types of advanced tax avoidance strategies require detailed planning by a dedicated tax professional. For instance, even if your life insurance policy is in your name or your business entity, estate taxes will still be levied on the value of your business. By setting up a specialist trust like an Irrevocable Life Insurance Trust and funneling your life insurance policy into that trust, you can shield those assets from estate/inheritance tax purposes, so your heirs don’t have to pay inheritance or estate taxes on them.
There are specialized estate tax shelter strategies that you probably wouldn’t be aware of unless you talk to a tax expert, as is the case of a Spendthrift Trust. Perhaps you have an heir that has an addiction or is financially unsound in some way and you don’t wish to leave the whole lump sum of your life insurance policy to that heir. You can set-up a Spendthrift Trust where independent trustees provision the money ordained by a set of guidelines you detail. Spendthrift Trusts also contain a modicum of asset protection benefits in that creditors can’t claim any funds until a recipient has actually received the money.
When combined with the doctrine of “surplus income,” something many states have adopted, this means that creditors can only attach trust income received that is above and beyond the amount necessary to support the recipient by reasonable means. There are many other advantageous trust options, such as dynasty or family trusts, which offer different ways to ensure your loved ones are cared for in every eventuality.
3. Yearlong Tax Planning
Although many people only focus on income tax saving strategies at the end of the year, the truth is that tax planning strategies work best when you start at the beginning of a tax year. Smart tax planning strategies are yearlong endeavors. For instance, you may want to consider the value of a tax loss harvesting strategy, accumulating losses now to offset future gains that will most likely be taxed at a higher rate. Your professional tax expert can help you evaluate which investments qualify for capital gains tax on short- and long-term capital gains and best match up all long-term gains with long-term losses (and the same for your short-term capital). The long-term capital gains tax is lower than the tax on short-term capital gains.
Or, you may simply want to accommodate and plan for your expanding venture. Creating or changing a business entity structure can greatly impact how business owners are taxed. There are also timeframes and deadlines to consider for filing and claiming certain deductions. The type of investments you buy or sell will also impact your taxes due. There are many tax-free investments you may want to consider, as well as other long-term strategies, such as planning for retirement and education. Investment vehicles offer a range of options for such as municipal bonds to mutual funds.
There are many tax rules for retiring and you may be penalized for trying to access these funds early. However, with a retirement plan from a tax advisor, you can plan to navigate the complex tax law to access social security benefits and retirement accounts during retirement. Another option you may want to consider is planning your charitable contributions, which can be used to lower your year-end tax. You may even be interested in a donor-advised fund. This allows you to set aside money for charitable contributions that you can claim now while dispensing a lump-sum distribution to a charity of your choice during later years.
4. Save Time
A typical CEO or high-net-worth individual makes, at the very least, $100,000 in taxable income every year. This breaks down to a $48 hourly wage if you work 40 hours per week. The IRS estimates that it takes Americans, on average, about 24.2 hours to complete their tax returns. This number more than doubles if you file a Schedule C for your business or Schedule E for your rental properties. So, at a minimum, you’re looking at spending $1,150 dollars of your own time–nearly $2,500–if your tax-reducing strategies are even a little bit complicated.
Think of it this way: You go to the doctor and a dentist for an expert opinion and healthcare planning. In the same way, you may want to consider going to a professional and knowledgeable tax attorney to create an expert tax plan for your unique tax situation. There are many reasons your taxes may be impacted, such as changes in marital status, investment gains or losses, business earnings or losses, real estate transactions, or even foreign income or assets. It can take a great deal of time to analyze and strategize your best tax plan in light of all applicable federal, state, and local laws.
5. Represent You in Case of an Audit
It may be unlikely that you’ll get audited. However, working with a professional tax preparer will significantly lower your chance of mistakes and therefore lower your overall chance of being audited. Nonetheless, your professional tax preparer will represent you in the event of an audit. This usually streamlines the audit process significantly, decreasing the time and headache of an audit while minimizing your overall tax liability. Advice from a tax professional is extremely helpful during an audit. A tax advisor will help determine what income is taxable at each tax bracket and if the standard deduction would be best or even if you would save on income tax due when married filing jointly versus separately. You may have gross income from passive investing which may be taxed differently from nonpassive income.
6. Constantly Changing Tax Code
Are you really prepared to spend the time necessary to understand how rental property depreciation, Alternative Minimum Tax (AMT), and mortgage interest deductions work? Or how different laws and changes to the tax code over the years impact what you can legally claim? Even if you have been filing your taxes for years, changes in your income or wealth may require a professional tax preparer to take a close look at your tax reduction strategies.
For instance, did you know that the new tax plan signed by President Trump doubles the gift tax exemption, estate tax exemption, and the generation-skipping tax exemption? A generation-skipping tax is incurred when grandparents directly transfer money to any “skip” person, defined as any other family members or unrelated individuals at least 37.5 years younger than the donor. The IRS levies an additional tax on inheritances that try to “skip” over a generation, like a grandparent leaving taxes to their grandkids.
A tax professional can work with you to plan a tax strategy to take advantage of changes to the tax code when they occur. TurboTax and the other tax-in-a-box programs may not find every deduction and credit pertaining to you and your financial situation. The more complicated your financial situation, the greater the benefit you’ll reap from hiring and utilizing a professional tax preparer. Tax professionals make it their job to come up with new tax strategies for small business owners or for the savvy real estate mogul. You’ve probably heard of smart investing, well it’s just smart tax planning to use experts in tax savings strategies as well.
7. Business Taxes
It’s a very good idea to consult with an expert when it comes to complicated business taxes. How your business is taxed depends on the structure and number of owners, as well as state and local laws. You may face double taxation as a C-corporation or pass-through taxation as a partner or sole proprietor. The Tax Cuts and Jobs Act set the corporate tax rate at 21% and also introduced a new 20% business income deduction for certain taxpayers. There are also many deductions and credits available for business owners, such as the home office tax deduction. In some cases, you can claim business travel and meals with clients or even eligible entertainment for employees. Another strategy involves claiming depreciation or even start-up costs. Thanks to recent tax reform, you may be able to claim bonus depreciation. Property owners may be interested in these real estate strategies, as well.
When startups or existing businesses experience losses, it may be possible to use those losses to ease your tax burden. In some cases, you can apply the losses to other income and if the loss is great enough you may be able to apply it to other years. You may only claim the losses equal to your involvement or stake in a company which is at risk, so a multiple-member limited liability company (LLC) or partnership would essentially split the losses. A C-corporation would claim the losses on a separate tax return, and an S-Corp (or LLC electing to be taxed as an S-corp) would split the loss among shareholders.
You used to be able to apply excessive business taxes to previous years and retroactively reduce your prior year tax liability. This meant you could be eligible for a tax refund from a prior year. However, the Tax Cuts and Jobs Act limited this to tax years prior to 2018. Moving forward, the losses are limited by annual taxable income but can still be applied to future years. If your business experienced a loss in previous years, you may be able to amend your prior year return. It is highly recommended that you consult with a tax professional before amending returns and dealing with prior year taxes which are subject to different laws.
8. Tax Debt
Taxpayers may be responsible for a range of taxes such as income, self-employment, or estimated taxes. Businesses might also have to pay employment or excise taxes, as well as sales and property tax. With all of these taxes, it is no surprise that you may end up owing the IRS, states, or local government. This happens frequently to those who do not have taxes withheld from their income, such as business owners, investors, freelancers, and those with rental property. Some taxpayers are required to make quarterly estimated payments of taxes when they are expected to owe over a certain amount. Investors have to pay taxes when capital gains occur, such as in the sale of stocks or excise of options. You will be taxed on net unrealized appreciation, such as on securities or brokerage accounts that gain value. Some businesses with employees are required to pay monthly taxes or face fines and penalties.
When the IRS or another tax agency is owed, they can place liens on personal or business assets–and in serious cases, they will seize or levy those assets to satisfy the debt. Before it gets to that point, it is important to act as soon as you receive a notice. There are many ways a professional tax lawyer can help you deal with a tax debt. First and foremost is to analyze the amount owed to ensure it is correct. In the case of a missing return, the IRS may file a temporary return on your behalf, and they may not have claimed all of the deductions and credits you can claim. The IRS may also have included amounts that you are not responsible for or that you already paid.
A tax lawyer can scrutinize your return to ensure the best outcome and make the necessary changes if needed. They can also negotiate with the IRS on your behalf. This is another area where a knowledgeable tax attorney’s experience is extremely beneficial. They know which forms to file at specific times, and how fast you must request appeals, as well as the steps required to recover any seized property. A tax professional can also help set up payment arrangements and have liens removed from personal or business property.
It Pays to Work with an Expert
There are many reasons to work with an expert tax professional. They can help you prepare for your taxes ahead of time and protect your estate or investments using trusts and yearlong planning strategies. This can include strategies to lower your taxable income in order to drop a tax bracket or to contribute to a retirement account during year-end tax time in order to take a tax credit on your income tax return.
In addition, a tax lawyer can save you time and money by providing expert advice tailored to your specific tax needs. The ever-changing tax code and its impact on taxpayers and businesses make it hard to stay up to date on current tax laws and regulations. There are also a variety of deductions and credits you may be eligible for such as those afforded by the recent Tax Cuts and Jobs Act. In the event of an IRS audit, your tax preparer can represent you and work on your behalf.
A tax attorney can help you navigate the complicated issues surrounding a tax debt. Determining taxable income, taking advantage of a capital gains rate, and planning for retirement all require expert advice. For more information on how a professional tax preparer can help with your taxes, contact the professionals at Anderson Business Advisors today.
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