Death and Taxes

Death and Taxes
07 Apr 2017

In a letter written in 1789, Benjamin Franklin is attributed with saying ” in this world nothing can be said to be certain, except death and taxes.”  This was true for the founding fathers of our country, and continues to remain so today.  While the inevitability of our future demise is a worthy topic, today’s focus will be on avoidance of taxes.

Tax Avoidance vs. Tax Evasion

Spend any amount of time with someone who deals with personal finance on a daily basis, you will hear the following quip.  What is the difference between tax evasion and tax avoidance?  About 25 years!  Tax Evasion is the illegal misrepresentation of your situation in order to not pay taxes owed.  Emphasis on the illegality.  Tax Avoidance, on the other hand, is the legal use of the various provisions of the tax code. These allow an individual or company to minimize the total amount of  tax due.  The difference lies not only in intent, but also in the honesty and integrity of which you conduct your business.

It is about this time of year I get a phone call to set up a meeting from people who have recently filed their tax returns.  Taxes are always top of mind.  Naturally they want to discuss ways that we can help to lower the total taxes due.  This usually brings up a couple of different talking points from a planning perspective.  Are we discussing minimizing the amount of taxes due today, or are we planning for future tax liability as well?

Tax Mitigation vs. Tax Planning

Tax Mitigation is simply looking at the short term and figuring out the way to legally pay the least amount of taxes today.  People who are concerned with this look to take advantage of every deduction they can find.  This would include ensuring all retirement plan contributions are made into Traditional type accounts.  If high income earners, they may be taking advantage of the tax deferred benefits of annuities.  Perhaps they make contributions to Health Savings Accounts if eligible.

On the other hand, Tax Planning is attempting to look not only at today’s situation, but model what the future may hold, and begin to plan accordingly.  This is when we begin to have at around the value of a Roth Conversion, and how that may play into the future.  We also begin to take into consideration the legacy aspirations as well.  They may want to know what the most efficient way to pass assets to the next generation is.  It is possible this is not the most tax efficient in terms of today, but could be in the future depending on the size of the estate.  We may very well have a conversation around how a Roth IRA may play into the final estate plan.

Perfection is not the goal

Don’t misunderstand me.  I am not suggesting that Tax Planning is perfect.  Indeed, there are a myriad of tax complications and laws that need to be understood.  This is why you should ensure that your financial advisor is working in concert with your tax professional and that you are seeking professional tax advice from a qualified tax person.  There is also the issue that Congress has the power to change the name of the game in an instant.  Good luck trying to predict what they are going to do with any certainty! (Although…what is popular and will get more votes in the next election?)

In reality, these are two very different conversations.  One is “a la carte” where we simply identify the issue of the day and attempt to “solve” it.  This may or may not put you in the best position for tomorrow.  The second option is the one that we subscribe to in our practice.  This is looking at the entirety of the financial situation, and solving for tomorrow as well as today.  This is taking into consideration today’s knows, as well as looking at the things we can control tomorrow.  By doing this, we continue to put ourselves in a better financial position. Until the day the other inevitable comes.

 

Today is the day, make it count!

 

Casey

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Casey Mushrush

Have a question or want to see a post written about a specific subject? Send me an e-mail at casey.mushrush@premieriowa.com. I am involved in many of the educational elements of Premier Investments of Iowa, including appearances on WMT Radio, WHO Radio, KXEL Radio, and KCRG Television. In addition, I am a frequent guest host of the Premier Pulse, a personal finance education video blog. I partner with my clients to develop a specific set of financial goals based on their personal situation. We analyze their state of affairs, map out a course of action, and implement a written financial plan based on their own circumstances. We design and implement a long term investment strategy guided by the principles of asset allocation and based on personal risk tolerance. I utilize behavior coaching to help clients deal with the emotional aspects of investing and stick to their long term plan. Additionally, I am responsible for the practice management of an Office of Supervisory Jurisdiction. I aid our advisors by ensuring they are running their businesses in a compliant manner, as well as providing direction and suggestions on process improvement and implementation.