An unexpected benefit of writing this newsletter for the last 6 months has been the ability to clarify what I do and for whom.

The best experiences I've had are when I'm walking alongside entrepreneurs on a path to meet their personal financial goals by lowering their cost of capital - quantifiable and not. This journey usually follows three steps unique to business owners:

1. Get better accounting
2. Get better tax strategy
3. Get better business forecasting

I spend a majority of my time on #2, but you can't do that without #1 (accounting), and once you have those you need to push it forward to the end goal of connecting your business' future performance (#3) and your personal financial goals.

This newsletter will remain tax-forward, but it's purpose will continue to be distilled into helping business owners and investors lower their cost of capital. To that end, I'd love to hear what you want to hear more about (or reply to this email with other ideas):

Enough reflection. Let's go into what makes good tax strategy better. It can grouped into 7 major foundational ideas. We'll go into them one by one:

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1) Tax Rate Arbitrage 🤏

The US Tax Code is a graduated tax rate system to tax individuals. That means that as income increases, tax rates increase. This is in contrast to a flat tax system - as is the case with C-Corporations (C-Corps). The graduated tax rates create a unique opportunity for individual taxpayers to take advantage of tax rate arbitrage.

Equally important to understanding how arbitrage can go right is understanding how it can go wrong. Tax rate arbitrage usually goes wrong when a taxpayer is overly short-term focused. E.g. deploying all methods to get tax paid to $0 with no consideration for the next few years.

In many cases, the taxpayer may be utilizing deductions to go from a 15% tax bracket to a 0% tax bracket (a 15% reduction) when that same deduction could be used next year to go from a 37% tax bracket to a 15% tax bracket (a 22% reduction).

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​2) Time Value of Money 🕰️

The time value of money is a basic economic concept. It is the application of this concept to taxable income and deductions that is a foundation of tax strategy.

For example, a $100 deduction taken today is worth more than the same $100 deduction taken next year even in the same tax brackets - because of the time value of money. The reverse is also true regarding taxable income deferred today.

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​3) Terminal Value of Wealth ☠️

At the end of a taxpayers life, there are only four places where the value and wealth they have created ends:

1. Spent during life
2. Donated to charity
3. Gifted to future generations
4. Paid as tax to various governments

This concept emphasizes the importance of planning with the desired terminal value of one’s wealth in mind. To achieve optimal terminal value of his wealth, the taxpayer must contemplate the demand on wealth caused by expected and unexpected life events.

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​4) Return on Hassle (h/t Mitchell Baldridge) 🎩

Taxpayers have access to an overwhelming amount of opportunities to minimize taxes. It is precisely this abundance that requires discipline and discernment when deciding which strategies to pursue.

Return on Hassle is a foundation of tax strategy because it focuses the taxpayer on opportunities that are not overly burdensome to pursue - on the front or back end.

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​5) Access versus Optimization 🤼

The taxpayer must remember that saving on taxes requires accepting trade-offs - usually between access to assets and tax optimization or protection.

For example, if you want to defer salary into a 401(k) plan you will lose access to those funds to spend as you want - until you take a distribution and pay tax on it. Likewise, if you want to protect assets from creditors you may need to give up full control over those assets.

Being cognizant of which stage in life you are in is critical to plan for how much of a trade-off you should be willing to make.

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6) Business Motives > Tax Motives 💼

Tax Court cases are filled with lawsuits of taxpayers that abused the tax rules in complex transactions strictly for tax purposes. While the courts admit that taxpayers are expected to use the rules to lower their tax burden, there must always remain a valid business purpose when the tax result is lucrative.

Business purpose should always remain one step ahead of the tax purpose to remain defendable to the IRS.

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7) Financial Milestones 🏳️

The journey of a taxpayer through life can broadly be categorized into approximately seven milestones. While the path through these milestones is not linear, it is generally progressive and helps to conceptualize a lifetime-perspective to tax planning.

We group these basic financial milestones as follows:

1. Saving 6-12 months of living expenses
2. Funding life and umbrella insurance
3. Early investing in low risk assets
4. Buying a first home
5. Growing a family
6. Mature investing in diversified assets
7. Generational wealth transfer planning

These milestones are both building blocks and a roadmap to some of the most impactful tax-adjacent events for an average taxpayer to consider. They also provide a useful framework on which to weigh trade-offs as discussed above.

Often times I'll encounter young professionals working to jump to #7 with exotic trust structures before they have 6-12 months of living expenses paid up or have life insurance funded. There's a lot of good ideas out there, but when and how to deploy them requires patience and experience.

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These are the foundational concepts that are the backdrop for the fancy allocations, elections, and timing strategies. On top of these foundations stand the three core types of tax strategies: 1️⃣ Structuring, 2️⃣ Elections, 3️⃣ Timing - which we've covered pretty recently.

If you didn't already vote on what content you'd like to see more of, please do so above!

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