Noted American jurist Learned Hand had a way with words, and his eloquence extended to describing the American system of taxation. Per Judge Hand, “in America, there are two tax systems: one for the informed and one for the uninformed. Both are legal.”
Judge Hand could be describing our Government Incentive Monetization™ (“GIM™”) process. In short, GIM™ is a process ASE developed and refined that identifies incentives in the tax code that help our clients reduce their overall tax burden. This allows those clients to keep more of their hard-earned money and achieve their financial goals more efficiently.
Let’s take a look at how GIM™ works and explore a few of the many ways that it may be implemented for taxpayers.
What is Tax Capital™?
Prior to diving into the available incentives in the code, we need to understand a concept that we refer to as Tax Capital™. Here is a simple example that demonstrates this concept as it relates to income tax.
Imagine a married couple living in South Carolina with $1 million of gross income. Under current tax law (taking the standard deduction), they would face a potential liability of $342,644 in federal income tax (for an effective tax rate of 34.27%) and $69.216 in state income tax (for an effective tax rate 6.92%). That’s a total potential income tax liability for the year of $411,871 if nothing is done to plan and redeploy that amount. That potential for redeployment is why we call that amount Tax Capital™ - investments can be made that will reap rewards in terms of a lower tax burden.
The same framework can be applied to other forms of taxation, including capital gains taxation.
One big factor must be considered with Tax Capital™- if you do not deploy your tax capital prior to the end of the current fiscal year, it turns into a tax liability.
How to Deploy Your Tax Capital™?
The answer is actually in the Internal Revenue Code (“IRC”). Rather than something to be feared, we collaborate with tax professionals by reviewing together how individuals and businesses should approach taxes.
Working with professional tax advisors, you can identify specific code provisions that apply, or may apply, to you and your financial situation and allow you to reduce your overall tax burden. This is the heart of our GIM™ process. This process should be applied at the entity level first if you have a business and then to your personal return.
Here a few provisions from the IRC and how they can help in a GIM™ process:
- Charitable Deductions:
- Basic: Donating to charitable organizations can yield tax deductions. While the amount of charitable contributions an individual can deduct in any one tax year is limited, charitable donations can help ensure that itemized deductions for the year surpass the standard deduction and help generate tax savings.
- Advanced: By utilizing a DAF (donor advised fund), you can gift highly appreciated assets to the fund, stack 2,3,5 or more years of giving, get a bigger deduction in the current year, and spread out the giving over several years!
- Business Deductions:
- Basic: If you're a business owner, the IRC allows you to take deductions for business expenses, such as home office deductions, vehicle expenses, and depreciation.
- Advanced: Above the line deductions can allow more deferrals for retirement, equipment, cap ex, as well as several other items that are used in a business capacity.
- Real Estate:
- Basic: Section 1031 of the IRC allows for certain tax deferred exchanges when a taxpayer is moving from one real estate investment to another. This has the benefit of not only deferring a tax payment, it also allows more capital of the taxpayer to remain invested.
- Advanced: Cost segregation, DST’s (Delaware Statutory Trusts), passive income and passive losses (PIG’s/PAL’s), are ways to utilize favorable code provisions.
- Qualified Opportunity Zones: Taxpayers facing large capital gains bills may be able to defer or eliminate that taxation. There are provisions that govern the tax implications of investing in so-called “opportunity zones.” These benefits include.
- the opportunity to defer tax on recent capital gains for up to 10 years.
- to potentially eliminate up to 15% of the total capital gain that was deferred; and
- the ability to permanently eliminate any capital gain created through the new investment as long as it is held for the 10-year holding period
This is a small sampling of the provisions that are available in a GIM™ process. At ASE Private Wealth™, we work with our clients and their professional advisors, such as tax and legal professionals, to identify and navigate opportunities and obstacles to create a bespoke action plan to most effectively deploy their Tax Capital™.
To say the IRC is complicated would be an understatement. That is why a tax optimization strategy like GIM™ requires clients to work with a team of professionals. If you feel you are paying more in taxes than you should, we can help. Our GIM™ process will help you achieve a stronger financial position and secure a brighter financial future.