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Tax Planning

The Truth About Tax Reduction and Asset Protection Strategies

The Truth About Tax Reduction and Asset Protection Strategies

There is a lot of literature and information out there about how to reduce your taxes and have better asset protection. Like all advice, some information is better than others. Unfortunately, when it comes to reducing taxes and making sure you have a solid asset protection strategy, a wrong move can cause serious financial and even legal problems. Getting your tactics from trustworthy sources is extremely important. 

At Protect Wealth Academy, the suggestions and tactics that the experts use and emphasize have been thoroughly researched, tested, and many of the experts even use these strategies themselves. If you want to know the truth about tax reduction and asset protection—and want to implement tactics that really work—then the resources at Protection Wealth Academy can help, starting with this article.

Tax Reduction and Asset Protection Basics

Reducing your taxes and protecting your assets is all about avoidance. You want to avoid overpaying while also avoiding unnecessary risk, particularly when it comes to your assets. Planning ahead is extremely important. You cannot wait until there is trouble on the horizon to start planning.  You must start now when the waters are calm. 

However, when some people hear about “tax avoidance” or “asset protection,” they get concerned that they are doing something unethical or illegal. In the vast majority of situations, this is just not the case. Instead, planning ahead can help you legally and ethically take advantage of tax and other laws as they are written. Unfortunately, many people just do not fully understand or appreciate the true value of planning ahead. This fear of illegality comes from a lack of understanding.

Creating your “avoidance strategy” now is a good idea for two primary reasons. First, you can think clearly and make rational decisions when you do not have the pressure of a lawsuit or tax audit on your hands. Second, you avoid any problems with potential fraudulent transfers by waiting to move your assets around. Waiting too long can not only undermine your plan, but it can also be illegal. You can avoid these potential pitfalls by getting the process started today.

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Avoidance-Based Tax Reduction Strategies

There is a huge difference between tax preparation and tax planning. Preparation involves simple software programs that will spit out numbers; tax planning is an all-year endeavor that can help you avoid tax overpayment. Avoiding overpayment of taxes requires a thorough understanding of your finances and strategies that will help you decrease your taxes. 

Now is a good time to consider reduction strategies that you can implement throughout the remainder of the year. The number one goal for tax reduction strategies is always to avoid the overpayment of taxes. You are under no obligation to pay higher taxes when you are not legally required to do so—and why should you?

You may have heard that using a business structure (regardless of the specific type) can help you significantly decrease your taxes because businesses, unlike individuals, can deduct their expenses before they pay their taxes. This advice is completely true, and this simple adjustment allows you to pay less in taxes overall. 

Some W-2 wage earners do not think that this particular tax reduction strategy applies to them, but that may not be the case. In fact, even those who have regular, full-time employment can still take advantage of this huge reduction strategy. You can be creative in creating a business that fits with your interests, and many hobbies can be turned into a business for tax purposes. As long as the activity “intends to make a profit,” then you can usually consider it a business. You do not have to actually make a profit, but that should be your intention. Even if you lose money, you may be able to deduct the losses from your regular income.

Avoiding Tax Audits

Tax audits are a simple check on your financial situation as reported to the IRS. You should always take care to keep paperwork of everything you do from a tax or business standpoint so that you have the information in the event of an audit. Since your tax planning strategy will not involve anything illegal, you should have nothing to worry about if you keep proper records.

It is easy to say not to worry, but tax audits can be confusing and intimidating. Most taxpayers want to avoid an audit if they can, if for no other reason than to dodge the stress and time involved in the process. It is no secret that the IRS as an agency is shrinking—they have less staff and much less funding than many previous years. From 2011 to 2016, they lost 28 percent of their agents and officers. As such, they are targeting specific types of taxpayers in 2017 to increase the “bang for their buck.” They have determined that taxpayers with higher incomes are more likely to use unscrupulous tax practices, so the very wealthy have become a frequent audit target, even more so than in previous years.

Certain types of deductions are also triggering letters from the IRS in 2017. For example, those with high charitable deductions may be getting a letter that requests proof of the deduction. Other notices have involved 529 college savings plans, mortgage interest, and “hobby losses.” However, as long as you are only taking deductions for a business that you intend to make a profit and you have documentation for all of your deductions and credits, these notifications should not be a real problem.

The IRS audits less than one percent of those who earn under $200,000 per year. Even those that make over $200,000 only have a three percent chance of being audited. 

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Wealth Management: Avoiding Incompetent Advisors

To avoid overpaying your taxes, you should also avoid using incompetent advisors. Not every financial advisor is a “good” advisor. There are various levels of licensure, education, certifications, and experience, and you should have an advisor that has somehow shown that he or she knows what they are talking about—some “advisors” may not be worth their fees because they know no more than you do. In fact, in some situations, you can act as your own financial advisor and skip the hassle of finding one that is right for you.

If you have a good advisor, he or she can help you take full advantage of the tax credits and deductions that are available to you. A good consultant will be able to create a plan that is in your best interests but also does not run into any problems with the IRS or the law. 

Choosing the right financial advisor can be difficult, particularly if you do not have your own understanding of your finances or the strategies that have already been discussed. If you have savvy friends and family who recommend a particular advisor, that may be a good place to start. However, do not assume that just because a certain consultant works well for your mother, that will be the right advisor for you. Each individual or family has unique financial needs—there is no one-size-fits-all approach. 

You should also keep in mind that tax preparers are not necessarily advisors, and they may not be able to help you find every deduction or credit that will help your situation. Careful planning with a true “advisor” can be extremely helpful.

When meeting with a potential advisor, you may want to ask him or her the following questions to “test” whether that advisor will be a good fit for your needs.

  1. How do you charge for services? How much will it be?
  2. What credentials do you have? Ask about licensing and certifications.
  3. What is the full range of services available? What will happen if I need a particular service that your firm does not offer?
  4. Do you have a specialization or do you usually serve a certain type of client?
  5. Can you show me a sample investment plan?
  6. Do you have a general investment approach that you use for everyone? (or for clients like me?)
  7. How much contact can I expect? Will I receive periodic updates or will I only get an update when I ask?
  8. Is there a team that will work with me or an individual?

You put a lot of trust in your financial advisor, so having a relationship that is comfortable for both of you is important as well. Consider whether the consultant seemed interested in you and your financial goals.

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Avoiding Lawsuits and Other Legal Detriments

Asset protection strategies attempt to move your assets in a way that they will not be threatened by creditors or those who have obtained a judgment in a lawsuit. Like tax avoidance, individuals often assume that asset protection is an illegal method to avoid paying your creditors, and the truth is that it can be—if it is not done properly. 

A court can completely reverse your asset planning efforts if you are doing it to evade particular creditors. However, you can engage in asset protection planning long before you have any issues with creditors.

Although asset protection can be extremely useful, the best way to avoid problems that asset protection is helping you address is to take steps to avoid lawsuits and other legal detriments in the first place. That is, you should make extra efforts to prevent inadvertently harming others or engaging in questionable business deals. Add that hand-railing on the stairs; do additional due diligence before entering that sales contract. Having proper and adequate insurance coverage can also help a great deal as well. Many people think of asset protection as a stand-alone tool for dealing with the aftermath of a lawsuit, but it should actually be used as part of an arsenal of considerations surrounding sound decision-making.

The team at Protect Wealth Academy can help you find ways to ethically and legally reduce your taxes and protect your assets. There are no dirty tricks here—only legitimate ways to improve your financial situation, strategies that are based on the laws as they stand today. Read our helpful articles and sign up for a free membership to our video library.

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