Money Management - March 2007

Effective Tax Strategies

Yielding Substantial Savings

by Jason Thomas

It is tax season again and the dreaded returns need to be filed. This article is not written to address all the vague rules that apply to complete a proper tax form, but rather, to explore tax strategies that can produce significant savings if planned and executed correctly. Implementing tax strategies can be accomplished with a scorecard that measures how much of every dollar earned is owed in taxes. In essence, if a dollar is made, how much of that dollar is the property of the government? “I don’t know” is not a beneficial answer.

If there is no knowledge of what is being paid, then it is impossible to measure what can be saved. Saving taxes takes effort, commitment, a bias towards action and an open mind. Perhaps these three tax strategies will be a fit as you move forward in your tax planning.

Strategy #1: Real estate is an excellent investment that can not only produce tax-free cash flow, but can also appreciate tax-deferred while reducing current year income taxes. If buildings are used for operations, then they can be segregated into components and written off over a short time frame, like five to seven years. Even better, if the property was not apportioned in the year purchased, the tax law allows for a correction to be made to receive a deduction in the current year for all the depreciation missed in earlier years. This strategy proposes a cost segregation plan and a large current year write- off for under-depreciated buildings.

Strategy #2: Sometimes the simplest strategy can yield the largest tax savings. Taxes are paid at an overall effective rate which depends on the type of income that is earned. For example, long-term capital gain income is taxed at 15 percent, while ordinary income can be taxed as high as 35 percent. All income should be questioned to determine if it is properly classified. Investigate whether the ordinary income reported should in actuality be classified as capital gain income, or can be converted to capital gain income by taking specific actions, like holding onto an investment asset longer than a year prior to sale. Making this simple decision could save twenty cents on the dollar in taxes.

Strategy #3: The latest retirement savings plan is known as the Roth Section 401(k) plan. It is a powerful plan and can even be set up for the sole benefit of a closely held business owner. The earnings of the plan grow tax-free and, if structured correctly, none of the plan assets will be taxed. This, in essence, can convert any plan asset to be a tax-free investment for life. The maximum annual contribution to a Roth Section 401(k) can be up to $20,000 per annum, and the plan assets can be self directed to purchase highly appreciating investments such as land. This means that the plan has the capacity to convert highly appreciating assets to tax-free investments.

There is a lot that can be done. The income tax is a voluntary tax in the sense that the taxpayer has the option to implement strategies to reduce what is owed. There are lots of tax saving alternatives to consider that are common, accessible, easy to implement, and effective. The strategies above do not begin to scratch the surface of tax saving possibilities.

Being aware of the opportunities is the first step to realizing tax strategy benefits. After all, the rules were written to reduce taxes, to encourage investment and strengthen the economy.

Jason Thomas
Jason Thomas is the tax manager for Fair, Anderson and Langerman, a Las Vegas-based CPA and business consulting firm.