When you first realize that your most significant personal and business expense—bar none—is taxes, it can come as quite a shock. Seeing so much of your hard-earned money wind up in the government’s hands can feel like a shakedown. That said, spending a relatively small amount of time and effort strategically reducing your taxes can pay major dividends.
Some people resist implementing creative tax strategies because they’re worried it will get them in trouble with the IRS. However, as long as you do things correctly, there’s absolutely nothing illegal or risky about strategizing to pay the least amount of taxes possible.
On the other hand, it is illegal to evade taxes. As the late Martin Ginsburg, Georgetown Law professor and husband of the recently deceased Supreme Court Justice Ruth Bader Ginsburg, said, “Pigs get fat; hogs get slaughtered.” In other words, you want to be smart when it comes to saving on your taxes but not greedy.
As the end of 2022 approaches, we’re entering the most critical time of the year for tax strategy, and this two-part series outlines how you can get fat without getting slaughtered.
PREPARE YOUR FOUNDATION
To save big on your 2022 taxes, your first step should be either building or rekindling your relationship with your team of financial professionals. These individuals will support you in establishing the foundation for developing and implementing your tax-saving strategies. At the very least, this team should include your Business lawyer, your bookkeeper/financial manager, and your tax advisor. They each have an essential role in your success.
If your bookkeeper’s job is more about data entry than financial management, you should look for someone new—or quickly get your current staff trained and up to speed. An effective bookkeeper will manage your books on a week-to-week basis (if not daily, depending on your business). Note I said “week-to-week,” not just month-to-month or quarter-to-quarter.
Your bookkeeper’s primary responsibilities should include daily/weekly cash-flow management, monthly review of reports and categorization of expenses, and quarterly updates of your forecast and projections. Again, if your bookkeeper isn’t providing these types of services for you, your business is missing an essential part of its financial foundation.
Outside of your bookkeeper, your tax advisor is the person who files your taxes. Ideally, you should meet with your tax advisor AT LEAST twice a year. We encourage you to meet once in May/June (after tax season) and once when approaching the year’s end in October/November. If you haven’t done that, DO IT NOW!
The purpose of the May/June meeting is a general catch-up and mid-year review that lets your tax advisor know what you’re financially on track to do for the year. Then, your advisor can consider the most effective tax strategies based on that information.
When you meet again (NOW) in October/November, that is when you’ll really get down to business. This meeting is when you’ll project cash flow through the end of the year and get a tax estimate using different assumptions, both with and without tax-saving strategies.
If your tax advisor cannot provide this level of service and is merely a tax filer, it’s time to get a new advisor. Your tax advisor should communicate with your business attorney to ensure that your financial strategies are supported with the legal tools and systems necessary to tie it all together and ensure it works properly.
PUTTING YOUR STRATEGIES INTO PLAY
Next week, we’ll discuss how to develop and implement creative tax strategies that will enable you to keep more of your money in your hands rather than the government’s.