TAX STRATEGIES FOR INDIVIDUALS AND THEIR LEGACY
How it All Started
“In this world nothing can be said to be certain, except death and taxes”.
We’ve all heard this famous quote many times. The fact is the when Benjamin Franklin was alive, the United States did not have an income tax. The reality is that the very first income tax was a 3% tax on incomes above $800.00. This tax was imposed in 1861 to help fund the civil war. The tax lasted until approximately 1872. In 1895, a supreme court decision made it clear that income taxes were a violation of Article One of the United States Constitution. This Supreme Court ruling lead to the introduction of and eventual passing of the 16th Amendment to the Constitution which allows for a Federal Income Tax. The amendment was ratified on February 3rd, 1913 and became official on February 25th 1913. In the first income tax law, people earning above $500,000 per year paid a 7% tax on everything above that. My how things have changed!
Since the implementation of the income tax, there have been numerous changes and amendments to the law. It appears that there have been many attempts to find ways to reduce or avoid paying income taxes altogether. This has been true since the tax was implemented.
Today, the question is, “Can I create a financial strategy that helps me to legally avoid paying income taxes? A famous quote from Supreme Court Justice, Learned Hand, who was born in Albany, NY in 1872 (the same year the Civil War tax ended), made it clear that you have the right to do everything in your legal authority to plan ways to reduce your income taxes. Here is his famous quote on the subject.
“Anyone may arrange his affairs so that his taxes shall
be as low as
possible; he is not bound to choose that pattern which best pays the
treasury. There is not even a patriotic duty to increase one’s taxes.
Over and over again the Courts have said that there is nothing sinister
in so arranging affairs as to keep taxes as low as possible.
Everyone does it, rich and poor alike and all do right, for
nobody owes any
public duty to pay more than the law demands.”
It is in this spirit that we strive every day to help clients to find ways to reduce or even to eliminate their income tax liability.
The Roth IRA was established under the Tax Payer Relief Act of 1997 and is named after its chief legislative sponsor, Senator William Roth of Delaware. Roth 401(k) options have also existed since January 1, 2006 when congress authorized the allowance of a Roth option for 401(k) plans.
The very good thing about Roth IRA and 401(k) plans is that once the funds are placed in the Roth, the original investment as well as the earnings are generally free from income tax as long as those funds remain in the Roth account. Click here to receive a free informational report on Roth IRAs.
At Vital Tax Solutions, we help our clients to determine whether it makes sense to have a ROTH IRA, how to fund it, and to project how taking income from a ROTH will impact their future income tax liability. Since Income from a Roth IRA is not taxable, one huge advantage to having Roth Income in retirement is that it does not impact the taxation of Social Security! CLICK HERE
IRA and 401(k) Accounts
The IRA is today’s most popular way to save for retirement. As opposed to saving in a 401(k) where you make “elective deferrals”, meaning that you choose to defer the receipt of income you earn now so that you can take it later in retirement, IRA accounts are deducted on your tax return. Both the 401(k) and IRA have the same tax impact however. In the case of the 401(k), you defer income and in the case of the IRA, you deduct your contribution. CLICK HERE for a report on the Social Security Taxation of an IRA.
The most popular understanding of IRA and 401(k) accounts is that it lowers your taxable income today in exchange for delaying the paying of taxes on those funds until later. There is a lot of information about IRA accounts and you can download a free report on IRAs here.
Does it make sense to defer taxes on income now and pay the taxes later?
At Vital Tax Solutions, this is a critical question we help our clients find an answer to. One thing that retirees with large IRA accounts need to remember is that withdrawals from 401(k) and IRA accounts will count towards the taxation of your Social Security Income in retirement. Roth IRA withdrawals will not impact the taxation of your Social Security. A valuable service we perform at Vital Tax Solutions is to help a client understand the trade-offs of paying taxes now and placing retirement funds in a ROTH versus deferring taxes now, by placing funds into a tax deferred account like an IRA and paying the taxes later. You may be surprised at how a Roth Conversion may help you keep more of your retirement funds since you will be lowering your taxes in retirement. It could mean the difference between paying significant income taxes in retirement vs paying zero or next to ZERO income taxes in retirement.
A Secret Tax Weapon
If what you knew to be true turned out not to be true, when would you want to know? Probably as soon as possible! Well here’s a simple truth. One of the most well respected CPAs in the country, Ed Slott (you may have seen him on PBS) says that “the tax exemption for life insurance is the single biggest benefit in the tax code”! To See his PBS talk on Life Insurance CLICK HERE
That’s right, LIFE INSURANCE! Here’s a little-known secret; the wealthy have known about the wonderful tax exemption for life insurance for decades and they use it!
Life insurance is an asset class that has numerous tax and risk mitigation benefits. At Vital tax Solutions, we help clients understand these wonderful tax exemptions and how life insurance planning might hold the key to a very safe, secure and prosperous retirement. It’s never too late to learn about life insurance as part of your financial and retirement planning.
There may be an added bonus to owning life insurance too! May life insurance plans also offer a possible solution to paying for long-term care or critical illness costs with riders or added features that allow for the insured to use their life insurance to help reduce or even pay for the cost of long-term chronic illness. Some policies also offer additional benefits for Critical Illness that may not cause the loss of your activities of daily living as required by a chronic illness or long-term care benefit.
Life insurance with “the tax exemption being the single biggest benefit in the tax code” you may also get a solution to health care planning needs as well. Click here to schedule a discovery meeting to find out more.
Vital Income Planning
Planning for retirement income must involve tax planning as well. It’s not about how much money you have, it’s about how much money you have to spend. When we create a VITAL INCOME PLAN for our clients, our process involves projecting potential income tax liabilities throughout retirement and what can be done to improve the situation. While everyone’s situation is different, it is rare for us not to be able to point out strategies our clients can take to their tax advisors to help reduce income taxes in the future. Click here to schedule a Vital Income Plan discovery meeting.
The Get Me to Zero Plan!
Imagine on your first day of retirement you realized you were a big fat zero! Well, not the way you think we mean that! What if you on your first day of retirement you;
- Had ZERO debt! You owed nothing on your home, cars, credit cards, student loans etc. You were completely debt free and owed ZERO!
- Had ZERO market risk! Because you had no debt and your income needs were being met largely by Social Security and perhaps IRA or pension income, you no longer needed to grow assets the same ways as when saving for retirement! Therefore, you could save and invest with no risk of loss? ZERO RISK!
- HAD ZERO Income tax liability! That’s right, in planning for this big day, whether it was in the years right before you actually retired or while you were still saving, you arranged your affairs so that none of your income was subject to income tax. This may not be possible for everyone, especially if you have a monthly pension in addition to Social Security, but even then, what if your goal was to get to the lowest possible tax bracket you could?
- HAD ZERO financial worries! Because you owed no income taxes, took no market risk and had no debt, you were financially worry free!
Is this possible? You may not think so, but don’t be so sure. At Vital Tax Solutions, one of our planning strategies is to see if we can eventually get you to ZERO in all three areas. Click here to schedule a GetMeToZero discovery meeting.