Equity and debt taxation: maximizing gain while minimizing taxes

A look at equity and debt taxation and strategies to cut down on taxes and protect your wealth

WHILE UNDER THE CURRENT U.S. TAX CODE we are obligated to pay taxes, we pay only once. Where we place our money after that (with hopes to accumulate more), taking into consideration equity and debt taxation, will dictate how many more times our already-taxed dollar gets taxed.

That simply means that when we end up with our final, spendable paycheck, where we put those (taxed) dollars will dictate any additional taxes. For example, if you buy a rental property as an investment, and you hold that property for many years and then sell, you will be taxed on that gain. When you use an after-tax dollar to purchase an investment (rental property) and it appreciates (grows), and then it is sold for more money than you bought it for, the profit is then taxed.

But there is a better way.

Equity and debt taxation and savings

Everyone’s goal is to accumulate as much as they can. What you do with those accumulated dollars will vary, depending upon your goals.

You may want a vacation home. You may want to retire sooner rather than later. You may want to be sure you do not run out of life before you run out of money, or vice versa. You may want to leave money for your loved ones after you have passed. And there is a tax-efficient way to accomplish these goals.

Every practice owner and business owner is stuck in the tax circle. You put it all on the line to start your own practice, you work long hours, you pay taxes. You work harder and make more money and pay more taxes. You put money away for your future and as that grows, you (often) defer the taxes. When you reach the pinnacle of your career and retire and start to live on what you accumulated, you pay even more taxes. The harder you work, the more you pay.

Business failure and taxes

What happens if your business does not work out?

The investment you made in your business that did not work out — what does that look like? How does the government treat your investment when your business fails? When you lose it all you do not get to write off your entire losses that year, or even the next. They allow you to spread that loss out over years and years, but not all at once. However, you lost it all at once.

But there is some good news.

Ideally, there would be a strategy whereby your taxed dollar can grow, and that growth is not taxed — and there is. Not only will those dollars not be taxed (again), but you can also live on that money tax-free.

Maximizing your cash flow

Maximizing cash flow takes a few things into consideration. Traditional retirement accounts are subject to a Safe Rate of Withdraw formula. That formula is a calculation that the financial services industry uses that takes every possible financial implication into account.

The formula (in theory) allows people to withdraw an amount every year and not outlive their money. As of this publication, the Safe Rate of Withdrawal is 3%. For a retirement account that has $1 million, a 3% withdrawal is $30,000 (taxable). And that account is subject to market fluctuations. In a down market, when you pull money from that account, you are killing off your working dollars. Where do you stand with your retirement account? Are you wondering if there is a better way? Indeed, there is.

Strategies to build your future

There are strategies that can be implemented that would allow for a 1-2% higher distribution than the “Safe Rate of Withdrawal.” Those monies would not be subject to market fluctuations. Not only that, but in regard to equity and debt taxation, it would be tax exempt.

Such an account can be used to help offset the costs of needing care (should a health event occur that requires you to need care). And upon your death, that account would be transferred to the people you designate, outside of probate, within weeks and without any equity and debt taxation at all.

There is a lot of time and effort put into growing a nest egg. There are many entities (silent partners) that are at the door wanting to take it away from you, from the government to business competitors.

Utilize strategies that put you in the best position possible so you can keep more of what you have worked so hard for.

BRIAN P. MICHAUD, CLTC, is CEO for Consult Encompass LLC, Encompass Group LLC, and a business consultant and financial strategist. He can be reached at 860-930-5330 or bmichaud@trustencompass.com.