People are funny. We tend to plan more for a vacation than we do for our own and our family’s financial future. Planning for vacation involves choosing a destination; deciding how to get there (means of travel, route, stops along the way); deciding how long to stay, where, and what to do while on vacation, and more.

Financial planning and even a subset of that — tax planning — is more involved and complex, yet we invest less time and effort engaging in it. As a result, many of us pay more than our fair share in taxes, leaving us with less of our annual earnings to enjoy and to invest in our own and our family’s future security, comfort, enjoyment, and self-fulfillment.

One way to simplify the process of tax and financial planning is to break down the task into distinct areas of your life where you can cut taxes, grow your net worth, and achieve peace of mind. This post steps you through that process.

Area 1: Family, Home, and Job

Age-old wisdom advises that “charity begins at home,” meaning that before we can help others, we need to build a firm foundation for our own financial health. It also means taking care of those closest to us first — our family members and friends.

Tax-savings and financial planning strategies should also begin at home with family, home, and job. Areas of focus should include the following:

  • Paying for education
  • Caring for children and elders
  • Buying a home and using the equity to build your assets
  • Capitalizing on employee benefits

For example, buying a home involves several decisions that can impact tax savings and future net worth. Key decisions include:

  • The house/real estate you purchase
  • Its location
  • Its potential for increasing in value
  • The amount you agree to pay for it
  • The mortgage interest percentage and term
  • Improvements to increase its value
  • And more

While you want to buy a home primarily for the purpose of enjoying it with family and friends, how it impacts your finances should be a close secondary consideration.

Area 2: Business Income, Expenses, and Taxes

A real business with the objective of generating a profit is the best tax shelter in America! To maximize the potential benefits, be intentional and intelligent when making financial decisions that impact both your business and personal finances. If you’re not proactive in your decision-making, decisions will be made for you and not always in your best interest. They could cost you a significant amount of money at tax time, especially.

When starting and running a business, you would be wise to consult with an accountant who can help you save far more in taxes than the cost of her or his services. Whether you choose to work with an accountant or fly solo, focus on the following key areas:

  • Business structure: Sole proprietorship, limited liability company (LLC), S-corporation, C-corporation, etc. How you choose to structure your business can provide options to pay yourself in ways that reduce your tax liability. For example, as a sole proprietor, you’re responsible for paying both the employer and employee portion of the Federal Insurance Contributions Act (FICA) taxes, which include 6.2 percent Social Security and 1.45 percent Medicare taxes. Organizing the business as an S-corporation enables you to pay a portion of your income in the form of distributions without paying FICA on those distributions. This requires careful planning (to stay on the right side of the tax law) and may result in significant tax savings.
  • Business expenses: Every business expense lowers the profit on which taxes are calculated. With a wise business expense strategy, you can reduce your taxable income while providing your business with the assets it needs to function, increase profits, and drive growth.
  • Business asset ownership and sale: How you choose to own assets in your business, whether and how you claim depreciation on assets over time, and how and when you dispose of those assets can impact the taxes owed on them. For example, assets held as capital assets — depending on the entity structure and the type of asset — could be taxed at more favorable capital gain rates instead of as ordinary income.
  • Employee benefits: Owning a business may enable you to meet certain needs for yourself, your family, and any employees at a discount by allowing you to charge the expense to your business, which reduces its profit, thereby reducing its tax liability. Receiving benefits pre-tax, whenever possible, reduces your out-of-pocket cost for the benefit.

Area 3: Your Investments

Tax strategy regarding investments generally involves investing through tax–deferral or even tax-free. Most people are familiar with tax deferral through vehicles such as individual retirement accounts (IRAs). You invest pre-taxed dollars, thereby putting more money to work for you. You pay taxes only when you withdraw money from the account — after it has had a chance to grow. An alternative to this is a tax-free IRA, commonly referred to as a Roth IRA. You invest post-tax dollars, they grow tax free, and the investment and the earnings are tax-free when withdrawn in retirement.

That said, you do have choices that make your investments more tax efficient. A few examples would include:

  • Maximizing contributions to IRAs and other tax-deferred retirement accounts
  • Buying and selling stocks, bonds, and mutual funds in ways carefully planned to reduce the tax liabilities on those investments and their gains
  • Managing real estate investments for maximum tax efficiency and growth
  • Using other financial products to reduce your overall tax liability such as investment grade life insurance, municipal bonds, tax-free distributions from life insurance products, and the use of entities.

Area 4: Cashing Out

When you’re ready to cash in your chips (i.e., sell your investments or other assets and withdraw money from investment accounts), your objective is to eliminate or defer as much tax as possible, thereby keeping more of the asset’s cash value for yourself, your family, and your future.

When you properly plan how to cash out, the effect can last for generations, especially if you  properly plan for:

  • The sale of your home and other personal assets
  • A tax-smart sale of your business
  • The sale of investments

When you focus on all four of these areas of your life, together, in a comprehensive, cohesive plan, your results multiply. As a result of tax smart and proper financial planning, you will positively impact your life and the lives of generations to come.

– – – – – – – – –

About the Author: Laura Stees, CPA is a Partner and Business Strategist with Stees, Walker & Company LLP — a San Diego, Calif.-based boutique tax consulting firm focused on personalized tax and financial guidance to individuals and businesses.

Disclaimer: The information in this blog post about simplifying the process of tax and financial planning is provided for general informational purposes only and may not reflect current financial thinking or practices. No information contained in this post should be construed as financial advice from the staff at Stees, Walker & Company LLP, nor is this the information contained in this post intended to be a substitute for financial counsel on any subject matter or intended to take the place of hiring an Certified Public Accountant in your jurisdiction. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate financial planning advice on the particular facts and circumstances at issue from a licensed financial professional in the recipient’s state, country or other appropriate licensing jurisdiction.