Tax Strategy

As like most American Capitalists, I hate paying my “fair” share of taxes. This time of year is always extra stressful as I am dealing with estimating my tax liability and waiting for those final K-1s to arrive. When I was a young kid in college, tax season was great because I usually got a bit back from Uncle Sam. But as Biggie Smalls stated, “Mo Money Mo Problems”.

I’m not an expert “tax avoider” but I do have some tips that I learned throughout the years to help me save a few bucks. Not all of these strategies will be useful to everyone, depending on where they are in their career, but they can be used as a helpful guidebook on how I think about deferring taxes into future years. I would also encourage everyone to drop their favorite tax planning strategies in the comments below so we can all learn something new today.

But before we get into my tax strategies, first a message from Masterworks…

“Alternatives Assets Are No Longer Optional”- JPM

Analysts have rung the warning bell. Inflation and lower economic growth — also known as stagflation — is here.

And rising energy costs aren’t helping either. Historically when oil rises 50% above trend, a recession follows. To defend your wealth for 2022, you may need more than just stocks and bonds in your portfolio. That’s why J.P. Morgan declared “alternatives are no longer optional”.

You could invest in overpriced real estate or gold… but most people don’t realize there are other potentially better alternatives out there. One of my favorites is contemporary art. 

From 1995 to 2021, contemporary art prices appreciated by 14.1% annualized with little correlation to stocks. Plus like real estate or gold, art can offer some protection from inflation. In fact, contemporary art prices appreciated by 23.2% when inflation’s above 3% like it is right now. Put all that together and you get an unbelievable asset class.

That’s amazing if you have $5,000,000 on hand to buy Picassos and Warhols. For the rest of us, there’s Masterworks— the investing platform securitizing multimillion-dollar paintings. 

In fact, I’ve personally invested in several Masterworks offerings. In fact, I’ll be investing in more soon because I believe that art is a key part of a balanced portfolio.

And guess what? My buddies at Masterworks are giving you all a special offer ← 

See important Reg A disclosures*

Tax Strategies

These tax strategies are ones that I personally use or plan to use. I have left some strategies off this list as they not applicable to myself, but I encourage everyone to comment their personal strategies below so we can all learn something new today.

Tax planning doesn’t start 10 days before taxes are due. Tax planning starts at the beginning of the year and is implemented everyday through the year. If you plan your tax planning at the beginning of the year, it will be less stressful when April 15th comes around.

Traditional IRA

For the Traditional IRA you can contribute $6,000 per year ($7,000 if you are over 50) and if you are married you can drop another $6,000 on that. Contributing to a traditional IRA lowers your taxable income by the contribution amount. You can invest in anything you want with the traditional IRA and defer your capital gains into the future.

Health Savings Account

A health savings account or HSA allows me and my wife to contribute $3,600 each or $6,000 in total, that lowers our taxable income by the contribution amount. You need to have a high deductible insurance plan in order to contribute and proceeds can be used tax free in the future if you use them on health expenses. You can invest in anything you want in the HSA and defer your capital gains. I like to invest in high risk stocks with my HSA account.

SEP IRA

A SEP IRA is for small businesses (typically single member LLC’s). You can contribute 25% of an employee’s compensation or $58,000, what ever is the lesser, and use this contribution to offset taxable income. You can then invest these contributions into anything you want and let the earnings grow tax deferred. Opening your own business and contributing to a SEP IRA is a great strategy as it allows you to drop a significant amount of income into a tax deferred account. I don’t know many other taxable accounts where you can contribute this high amount of income.

Direct investments in oil and gas wells

I haven’t don’t this yet but plan to do it in the future as it offers one of the most lucrative tax advantages in the U.S. tax code. As an example, if I invested $100,000 into an oil and gas well it can reduce my taxable income by up to $95,000. The three key tax benefits of investing directly into an oil and gas well are:

1. Intangible drilling cost: 75-80% of the well costs can bey 100% deductible in year one

2. Tangible drilling costs: 10-15% of the well cost can be depreciated over the life of the well

3. Depletion allowance: allows you to deduct 15% of the annual income from your oil and gas well once production comes online.

Investing directly in an oil and gas well is pretty risky and requires a bunch of upfront capital. But it comes with huge tax benefits and should you hit a producing well, it could generate income for years to come.

I’d be interested in chatting with anyone who is in the oil and gas industry and has implemented this strategy. Feel free to reply to this email if you want to chat.

529 Plan

529 Plan’s are a tax strategy designed to help pay for a future beneficiary’s education. There are no contribution limits, but contributions to a 529 plan are considered completed gifts for federal tax purposes with a limit of $15,000 per donor for tax year 2021. Excess contributions above $15,000 must be reported to the IRS on form 709 and will count against your lifetime estate and gift tax exemption.

Benefits of contributing to a 529 is that contributions grow tax deferred and no income tax is paid for qualifying expenses (education). Also, some states allow you to deduct your contributions from your annual taxable income. In addition, you can reduce your personal taxable estate through accelerated gifting. This means you can make five years worth of “gifts” loaded up front or contribute $75,000 (single) or $150,000 (married) in a single year.

As a donor you stay in control of the account and can have it in your name until you have kids.

LLC Expenses

As an owner of an LLC I can expense certain items to my income statement which lowers my taxable income. Here is a quick list of a few common items that can be expensed as an LLC or business owner. It should be noted that certain expenses can only be expensed by certain businesses and you need to make sure you are following all tax laws.

• Rental expenses

• Charitable giving

• Insurance

• Phone bill

• Tangible property

• Meals and entertainment

• Professional expenses

• Independent contractors

• Other costs of goods sold

Tax Loss Harvesting

As much as I would like it, I do not swing a perfect 100 when batting in the stock market. A great way to lower your taxable income it to harvest tax losses on losing stocks. In addition, making sure to hold stocks so they go long-term will save you money on capital gains tax instead of harvest gains when they are still short-term.

Summary

These are just some of the many tax strategies that are out there. There are hundreds of other strategies, but there are some that I use every year to lower my taxable income. I urge everyone to comment their favorite tax strategies below so we can start a thoughtful conversation on how to save money when tax season rolls around.

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