By Jacob Stewart, JD, and tax strategist at TOP CFOS
Did you pay federal income taxes last year? If the answer is yes, you more than likely paid too much in taxes. Think of all of the taxes we pay. After sales tax, gas tax, property tax, state taxes, municipal taxes, Social Security, Medicare, stamp taxes (in some states), gift taxes, transfer taxes, etc., we still have to pay taxes on our income to the federal government. As if that weren’t bad enough, at death, some people have to then pay taxes on money that has already been taxed. I’m not saying taxes are bad. They have their purpose.
What I am saying is that many Americans, especially those who earn higher incomes, are paying a lot in taxes each year and could pay less with a little proactive planning help from the right adviser.
Not your duty
Thankfully, it is not a civic duty to pay more in taxes. One of my favorite quotes on the subject is by a former US Court of Appeals judge, Justice Billings Learned Hand: “Anyone may so arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay 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 one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor; and all do right, for nobody owes any public duty to pay more than the law demands.”
I have worked with thousands of business owners all over the country. Of all of those people, I have only come across about two or three who were taking advantage of all of the legal deductions available to them. Why are so few people maximizing their deductions? There are at least two possibilities:
1) Lack of knowledge
The current tax code is over 2,600 pages long, not including all of the court cases that further elaborate upon the laws. Few tax professionals, let alone their clients, are familiar with the majority of the code and the wide variety of strategies and deductions available to the taxpayer. While some advisers work to acquire specialized knowledge in this arena, most rely on their software to guide them through the filing process.
Still others may be aware of additional strategies, but are afraid of an audit because they don’t know how to properly document more complex deductions. The problem is multiplied because most clients don’t know whether or not their adviser is taking advantage of all available deductions. I have had many people decline to get a second opinion because they believe they are already being taken care of by their current adviser. As mentioned earlier, this is usually not the case no matter how friendly or professional an adviser may be or how long he or she may have been practicing.
2) Lack of motivation/time
On the part of the taxpayer, a bit of time and organization are required to take advantage of many deductions. Proper documentation is vital to validating your deductions. For example, I may know that I can deduct my vehicle miles (or actual expenses), but I may not be willing to take the time to keep a log (or I may not be aware of the multiple applications that can do it for me).
As for the adviser, many tax preparers are working 60-80 hours per week during tax season. They don’t have the time or energy to identify areas for improvement and help clients plan better for the current year. In some cases, advisers may simply lack the motivation to promote proactive planning to their clients because they are already earning a very comfortable living simply processing tax returns.
No matter what category you or your adviser may fall into, it is worth seeking a second opinion on your taxes. A good adviser will meet with you at least twice a year (once to file your taxes for last year and once to create a tax projection and help you plan for next year). If you are an employee, when was the last time your adviser talked to you about setting up a small business on the side? Quality, proactive planning is desperately needed, unless of course, your favorite charity is the federal government.