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By Igor Krishtul, ChFC, EA

At one point, Americans were free from income taxes. Federal and local alike. Not to mention of course, Social Security, payroll and sales taxes. Don’t forget the gift and estate taxes, as well as other government extractions.

Things changed, though, and they don’t remain the same ever since. Now, taxes are as American as apple pie. They simply can’t be eliminated from our lives. But, excessive taxation is purely voluntary.

Tax evasion is a crime punishable by law. Even very powerful individuals have been imprisoned for evading taxes. Tax avoidance, on the other hand, is 100% kosher. Not only that, but every prudent individual should strive to reduce taxes to their rock bottom minimum.

The government bureaucrats claim that out system of taxation is “voluntary”. In reality, it is forced upon American citizens, residents and even some non-residents. This should not stop you, however, from reducing your taxes by any means the law permits. It is possible to build a greater wealth by saving taxes than by making more money.

Tax planning should not be limited to federal, state and local income taxes. It must also include other taxes, such as gift and estate. To be truly meaningful, all planning must be done in advance. Once liability is incurred, it is generally impossible to recover money lost to taxes.

In addition, the time horizon for tax planning must be long-term. It is quite unfortunate, but in great many cases the taxpayers limit their strategies to short-term solutions. Such solutions are temporary and often backfire at the end.

Tax-free bonds and mutual funds escape taxation. But, they normally generate substantially lower returns than their taxable equivalents. Often, they can barely keep up with cost of living increases.

Tax deferral strategies may alleviate the current tax burden. But, such solutions are temporary. In many instances, the eventual tax liabilities that are far greater than the previous tax savings. Such strategies cannot avoid the inevitable - payment of tax by you or your heirs. The payout rates may be much higher than previous temporary write-offs.

Creating mega IRA and qualified pension balances defers taxes. But, postponing payouts to avoid current taxes often boomerangs. Eventually, the government will still get their share in form of income and/or estate taxes. At the end, these taxes may be more than the savings.

Leaving everything to a spouse upon death can postpone estate tax. IRA and qualified pension money can also be rolled over by a surviving spouse. In such cases, the taxes can also be postponed. But, one day, the property will pass to future generations. Your children may end-up paying more in taxes than you originally saved.

We, the taxpayers, have unwanted partners. They are imposed on us against our free will. They come in the form of federal, state and local governments. They want their share when income is generated. Same goes when wealth is transferred to heirs by gifts or bequest after death.

We cannot eliminate them from collecting taxes. Yet, it is within our power to minimize their share of our income and wealth, and even completely disinherit them.

 

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