Consumption Tax or Income Tax? The Difference is Critical for Lowering your Tax Bill
Consumption Tax or Income Tax? The Difference is Critical for Lowering your Tax Bill
When you understand how tax works, you can position yourself to save your hard-earned money and build your wealth
Trump’s campaign has drummed up a lot of discussion about taxes, tariffs, and the best plan to strengthen the economy and support American workers.
In particular, the conversation has turned to Income Tax vs Consumption Tax in a recent New York Times article.
Here’s what you need to know and why it matters:
Income Tax: You are taxed on the income you earn or receive
Consumption Tax: You are taxed on the money you spend.
What most don’t understand is that although we have what is called an Income Tax, it is already functioning like a consumption tax - at least for those who are positioned correctly to take advantage of these savings.
Here’s how it works:
Employees get taxed on all of their income - they aren’t in position for any tax savings
Business Owners and Investors get taxed the money they save or spend on themselves.
What they reinvest into their business or investments reduces their income, thereby reducing their taxes.
This makes sense at one level, but if it is this simple, why do business owners get it wrong so often and end up with huge tax bills?
Why Tax Planning?
The reason is that the tax code is a labyrinth of rules and regulations for how you can structure and flow your expenses and investments to qualify them for reducing taxes.
What this means for Business Owners and Investors is that they need to plan ahead to position themselves and their investments and expenditures to ensure they can take full advantage of the tax savings available to them.
This is Tax Planning, which includes:
Evaluating your current and future income, assets, and life situation,
Along with your wealth-building goals, future income, retirement, and estate plans,
To prepare a strategic plan to position you to
Accelerate your wealth creation and
Result in the lowest tax liability.
The difference? When we work with Business Owners and Investors with Tax Planning, we are regularly helping reduce our clients’ tax bills by 20-50% or more, resulting in $20k to $1mm+ in tax savings.
What Tax Planning Looks Like
What does this look like? It’s likely going to be a bit different for each Business Owner or Investor. Here is a rough sketch of some key strategies we’ve worked on for different clients:
Real Estate Investors
Structuring activity to avoid passive loss limitations
Maximizing Depreciation through Cost Segregation
Partial Asset Disposition Elections
1031 Exchange
Small Business Owners
Maximizing Deductions
Bonus Depreciation
Hiring Children
Entity Structure Optimization
Medium-Sized Business Owners
Section 1202 Small Business Stock
Captive/Financed Insurance
R&D Tax Credit
Energy Tax Credits
Trusts
Investors
Self-Directed Roth IRA
Leveraged Film Investment
Leveraged Asset Donation
Charitable Holding Company
Estate Tax Planning
It’s your money you are earning and investing - close the loop with Tax Planning to keep your hard-earned money to maximize your wealth.
Interested in what Tax Planning can do for your year-end tax bill? Reach out for a free consultation to review your financial and tax situation.