As an individual, business owner, or investor, you leverage the power of compounding returns to grow wealth exponentially. Using a different approach, you can slash your taxes by layering four distinct tax-cutting strategies. Applying one strategy alone delivers good results, applying two strategies in tandem improves results, and applying all four maximizes your tax savings and increases your net worth. With every added layer, you not only keep more of your money, but also have more to invest to reap the rewards of compounding returns.

This post reveals four key tax-cutting strategies and explains how to leverage them, alone and together, to maximize your savings.

Shifting

Shifting involves moving taxable income from a higher tax rate person or entity to a lower one; for example, from a parent to a child, from an adult child to a parent, from a sole proprietorship to a corporation. In many cases, shifting delivers the added benefit of moving taxable income to a less audited entity, as well. Changing your business entity from sole proprietorship to S-Corporation opens the door to more tax strategies, lower tax rates, and lower audit rates.

Keep in mind that if you don’t specify an entity for your business, sole proprietorship, the least tax efficient, is the default chosen for you. Instead of letting the government default to that choice, make it yourself and take control of your tax rates.

Timing

In the tax world, timing isn’t everything, but it is certainly valuable in helping to reduce one’s tax burden. Timing strategies generally defer taxes to future dates to take advantage of lower future rates or utilize the time value of money. The most obvious tax strategy related to timing involves deferred tax instruments, such as individual retirement plans and 401Ks. These instruments allow you to invest money for retirement, pre- and post-tax, and pay taxes on it, or on the earnings, only upon withdrawal. In the meantime, you’re able to invest a larger sum of money and earn returns on that larger sum. Think of this as borrowing Uncle Sam’s money to build your retirement assets.

Caution: Planning is the key to success here. With improper planning, you could be forced to claim earnings at the worst time, with a portion of your earnings falling into the highest available tax bracket.

Code

Although you’re not exactly following the Yellow Brick Road to the Wizard of Oz to claim the object of your desire, you simply need to follow the 70,000+ pages in the Internal Revenue Code (aka, the Commerce Clearing House [CCH] Standard Federal Tax Reporter) to claim the tax savings you’re entitled to.

Legislators write tax code, in part, to encourage and reward certain desired behaviors, such as saving for retirement, starting and growing a business, owning a home, having and supporting children, having health insurance, and so on. Many specific code sections offer specific tax breaks.

By following the tax code, you can take advantage of available strategies, credits, and deductions to save thousands of dollars. As a result, the advice is simple: Follow the code.

Product

Products can fit into all of the previous three strategies, but one difference with product strategies is that they have government lobbyists protecting them. Product based strategies let you take advantage of lower rates or other breaks for specific investment products.

For example, suppose a group of United States senators decides life insurance and its tax-free death benefit are only for those considered high-net-worth individuals and therefore should be eliminated. The insurance lobbyists would immediately step in to educate these wayward members of Congress and demonstrate that the tax-free death benefit of life insurance is what protects our families, our spouses, and our children, in the event of a death of a primary earner. Viola! The tax-free death benefit of life insurance is preserved.

We carry a long list of products that can be used to reduce, eliminate, or defer your taxes.

When you use all four tax-cutting strategies in a comprehensive plan, you multiply the effect of your tax savings — putting more money in your pocket today, growing your business, growing your net worth, and ensuring your future.

– – – – – – – – –

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 cutting tax liability 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 a 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.