Tax Planning

Tax Planning Means Different Things to Different People

Most people who touch your taxes think about the job differently than I do. A CPA, an accountant, or an Enrolled Agent usually treats tax planning as preparing an accurate return and sending you the bill. Some might point you toward a SEP IRA or a SIMPLE Plan, but that’s rarely real tax planning. An estate attorney thinks of tax planning as drafting living trusts to maximize your estate tax exemption. A financial planner or insurance advisor often thinks tax planning just means funding a 401(k).

I try to build something more complete than any single piece of that, and to be proactive about it instead of reactive. Real tax planning draws on a lot of different tools: the right corporate structure, captive insurance companies, family limited partnerships, “freeze” partnerships, Retirement Life™ (a tax-free wealth-building tool), Roth IRAs and Roth 401(k)s, qualified retirement plans, charitable remainder trusts, charitable gift annuities, family foundations, intentionally defective grantor trusts, long-term care insurance, HSAs, single-premium life insurance with an LTC rider, and Roth IRA conversions.

Here’s what I want you to take from that list: if the person handling your finances doesn’t actually know these tools, you’re probably leaving money on the table. That usually shows up as paying more than you need to in income tax and capital gains tax today, and your heirs paying more than they need to in estate tax later.

Doing nothing is the default most people fall into. I’d rather you be proactive about protecting your money from the IRS and your state government. Your single most reliable creditor every year is the IRS, and the only real defense is planning ahead of time, with someone who actually knows what’s available.

Information provided is not intended as tax or legal advice and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional.

Health Savings Accounts (HSAs)

Health Savings Accounts are one of the most underused tools available to a small employer trying to lower health insurance costs. An HSA is a separate account that sits alongside your company’s health plan, letting the employer or employee contribute money tax-deferred, to be spent later on qualifying healthcare costs. Individuals and the self-employed can open one too.

Money in an HSA can cover deductibles, co-pays, and a range of expenses a typical small-employer plan doesn’t touch: contact lenses, prescription glasses, dental work, orthodontics, and more.

Why bother with one?

• It can genuinely lower your health insurance premiums, sometimes by a lot.
• Your business can offer richer benefits without adding out-of-pocket cost.
• Unused funds roll over year to year, and after age 65 can function as supplemental retirement income, much like an IRA.

HSAs pair with high-deductible health plans, and raising a deductible naturally makes both employer and employee nervous at first. The trick is funding the HSA to cover that gap. Money that goes unused stays with the employee for future medical costs, and once enough has built up to cover the deductible, the employer can scale contributions back and meaningfully cut ongoing costs.

So why doesn’t every business use one? Three reasons, mainly. A lot of insurance agents don’t like HSAs, because lowering a client’s premium cuts their own commission, and they earn nothing on the money going into the HSA itself. Employers are often hesitant to raise deductibles even when the tradeoff, fully explained, is one employees should welcome. And businesses where several employees reliably hit their deductible every single year will find an HSA harder to make cost-effective.

Tax-Deductible Long-Term Care Insurance

Under HIPAA, long-term care insurance premiums get treated the same as health insurance premiums for the self-employed. That means the owner of a C-Corporation, S-Corporation, P.C., or LLC can deduct LTCI premiums, though the deduction is limited for owner-employees outside a C-Corp. There’s genuinely no good reason for a C-Corporation owner to pay for long-term care coverage with after-tax dollars.

Would you take long-term care insurance if it were free? Nothing’s actually free, but a return-of-premium rider, set up correctly, can get you close. Picture a business owner worried about paying six figures out of pocket for care someday. They fund a limited-pay LTCI policy through the business, tax-deductible, with a return-of-premium rider attached. If they never need care, their heirs get the full premium back, income-tax-free. If they do need care, the policy can pay out many times what was put in, and the estate never absorbs the actual cost. Buying LTCI through the corporation with pre-tax dollars lets a business owner protect the estate from long-term care costs while still preserving that money for their heirs.

This example is for illustrative purposes only and does not take into account your particular investment objectives, financial situation, or needs and may not be suitable for all investors. It is not intended to project the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.

Tax-Favorable Charitable Planning

Most people don’t realize charitable giving can work in your favor, not just the charity’s. Imagine a tool that increases your discretionary income, reduces or eliminates income tax, capital gains tax, and estate tax, leaves a tax-free inheritance for your heirs, and builds a lasting family and social legacy. That’s what good charitable planning can do.

There are several ways to structure this, but the Charitable Gift Annuity (CGA) is worth understanding on its own, since it delivers three distinct benefits at once:

• Guaranteed income protection: a CGA pays your beneficiaries guaranteed lifetime income, either immediate or deferred.
• Real tax benefits: transferring a highly appreciated asset to a charity in exchange for a CGA avoids a lump-sum capital gain, delivers a substantial immediate income tax deduction (with any surplus carried forward), and removes the asset from your taxable estate.
• A genuine charitable benefit: beyond the gift itself, a CGA can be structured so your heirs help direct the charitable funds, passing your own values on to the next generation.

A related strategy, often called wealth replacement, takes some or all of the income stream from a CGA and uses it to fund a life insurance policy inside an Irrevocable Life Insurance Trust (ILIT), so the death benefit reaches your heirs income- and estate-tax-free, alongside the charitable gift and its deduction.

On paper, charitable giving sounds simple: give something away, take a deduction, replace the value for your heirs. In practice it deserves the same care as buying life insurance. The wrong advisor can build a plan that serves their own interests more than yours or the charity’s.

Information provided is not intended as tax or legal advice and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional.