Create a Tax-Efficiency Team With Tax Professionals

Tax efficiency is a simple concept. Given two investment scenarios, the tax-efficient scenario is the one that generates the least amount of taxes.

By taking the time to set up a collaborative relationship with a financial advisor who works with tax mitigation strategies, Certified Public Accountants, Enrolled Agents and other tax professionals can change focus on tax-planning, which may result in greater revenue generation and greater client satisfaction because of tax savings. (For more, see: Have You Started Year-End Tax Planning?)

When I started evaluating the investment solutions on our platform from the perspective of how they can mitigate taxes rather than just the returns they yield, I developed a strategy for nearly any high-net-worth client. It’s as simple as this: consider all the sources of income.

Mitigating Taxes on Income Via Collaboration

Here is how you mitigate the taxes on those sources of income. Collaborating with tax advisors leads to a more comprehensive plan for an individual. An insurance agent is trying to solve all problems with insurance and a real estate agent, perhaps, solving all problems with real estate. From the client's perspective, if you're working with a number of different financial service providers who may not share all information with the other advisors, you can end up with products that may not be efficient for your needs and even work at odds against each other.

When I see a client for the first time, I look at their entire financial picture. Usually, action needs to be taken such as rearranging insurance policies and transferring insurance to a plan with more flexibility to create income. Often the client was not aware of the possibility of having this complete financial picture service.

The use of tax mitigation investment strategies can be beneficial to any person with investable assets. Aside from the tax savings, it is important to invest with a plan, understanding that how you invest will positively or negatively impact your bottom line. Benefits from wealth management strategies increase as income and net worth increase. An individual in the 39.6% tax bracket has the opportunity to benefit more than someone in the 25% tax bracket. If tax-savvy strategies that have a positive effect of saving taxes are deployed, individuals may be able to keep and invest more of what they make. (For more, see: Tax-Efficient Portfolio Tips for High Income Earners.)

Mitigation Strategies

Since it is every person’s responsibility to pay only the taxes they are obligated to pay, here are sections of the Internal Revenue Code (IRC) that can be applied to reduce the your tax obligation and the amount of taxes that are required to be paid. It is from this perspective that I am creating these tax mitigation strategies:

  1. Ordinary Income: (This strategy may be able to be used in the 2016 tax year.)
    1. One primary strategy involves an IRC § 170h Charitable Contribution. With approximately $75,000 in federal tax liability, the charitable contribution should be able to reduce tax liability by approximately 15%. At higher income levels the charitable contribution tax liability reduction tops out at about 25%.
  2. Investment Income:
    1. Form 1040 Line 17 “Rents and Royalty Income.” This strategy involves using investments that impact Form 1040, Line 17. Income-producing investments are available that can mitigate impacts to Line 17 by partially or fully sheltering income from those investments or providing shelter that is sufficient to reduce Line 17 income below its original value prior to using the strategy.
    2. Purchase and sale of assets including real estate.
      • The real estate strategy involves an IRC § 1031 Like Kind Exchange, which can defer the payment of taxable liability to a more opportune time.
      • For non-real estate (or real estate “boot”), taxpayers can use investments that provide substantial first year write offs.
    3. Net Operating Loss (NOL) Carry Forwards, IRS Form 8582. Some people have excess NOL carry forwards. In some cases, the extent of the NOLs is such they cannot be extinguished within the 15-year carry forward period without external intervention. This strategy involves the use of investments that are passive income generators (PIGs). To take advantage of this strategy, the client must have additional investable assets, which are used to acquire the PIG. Assets are available with annual returns in the 8%+ range that provide 85% to 100% passive income. Income generated through the use of this strategy is effectively tax-free until the NOLs are extinguished.
    4. Tax-Deferred Income. This involves tax-efficient retirement plan maximization. A secondary strategy occurs when clients have additional discretionary income that could be more tax efficiently deployed in a tax-free account.
  3. Retirement Income: Insurance solutions can provide effective tax mitigation planning strategies. Four major planning areas include: retirement planning (income above $300,000), legacy planning (net worth above $2.5 million), charitable planning (net worth above $2.5 million) and business planning (revenue above $2.5 million).

Consider the tax-saving potential allowed via these IRCs:

Group 1

  • IRC § 1031 like kind exchanges allow the owner of real property to sell one property and acquire one or more replacement properties without recognizing the gain at the time of sale. The gain is not forgotten, it is merely deferred to a more opportune time.
  • IRC § 179 deduction allows the users of the deduction to expense rather than amortize certain business-related expenses. I use it differently.
  • IRC § 170 (h) allows users to make contributions for charitable purposes that result in a reduction in tax liability.
  • IRC § 7702 allows users to make after-tax contributions to a life insurance contract where withdrawals can be made tax-free. This is similar to what a Roth type of retirement account can do.

Group 2

  • IRC § 42 allows users to take a tax credit for investment in qualifying low-income housing.
  • IRC § 47 allows users to take a tax credit for investment in qualifying historic structures. This is a specialized form of a conservation easement.

Group 3

These code sections have come up in discussions I’ve had with other tax professionals.

  • IRC § 469 Passive Activity Loss Limitations: This strategy affects users who have significant passive activity losses (PALs).
  • Required minimum distributions (RMDs). There are two strategies regarding RMDs, one of which is covered by Treasury Decision 9673. These strategies affect users who are obligated to take RMDs from their retirement accounts, but who would rather not take them.

I only provide this comprehensive strategic tax mitigation approach to clients through and with the approval of tax professionals because I’m neither an accountant nor an attorney. The use of some or all of these tax-planning strategies can provide clients with tax relief, often into six figures. I consult with investors and their tax professional to analyze financials in which strategic tax mitigation may be appropriate. (For more, see: Important Year-End Tax Moves for 2016.)


IREXA Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies. IREXA, SANDLAPPER Securities, and Sandlapper Wealth Management are not tax professionals or attorneys. IREXA only provides client tax mitigation strategies through, and with the approval of our client’s professional counsel.

Tax Mitigation strategy results may vary depending on the individual financial situation of each client.
Securities are offered through SANDLAPPER Securities, LLC (SLS), member FINRA/SIPC. Advisory services offered through Sandlapper Wealth Management LLC (SLS-WM) an SEC registered investment advisor, 800 East North St, 2nd Floor, Greenville, SC 29601, 864.679.4701. IREXA is unaffiliated with Sandlapper Securities, LLC and Sandlapper Wealth Management LLC.