By Dr. Jim Dahle, WCI Founder

The most commonly requested service we are asked for here at The White Coat Investor is help with taxes, particularly an accountant local to the requester. That's a real bummer, because it is one of the most challenging referral businesses to run.

No. 1, it's impossible for a blog to maintain a list of professionals in 50 states—much less 19,500 municipalities—in any sort of profitable way.

No. 2, few tax professionals actually need or even want to advertise, much less pay what we would charge to access the high-income/high-net-worth group that reads The White Coat Investor. There are way too few accountants in this country. Most of them are already busier than they want to be. Sometimes people just ask who my accountant is, but the last accountant I'm going to give you is the one I use myself. I really don't want that company to have any more clients than they already have. This year, they sent me a 56-page form to fill out before they prepare my tax return. If all their clients are willing to do that, they have nothing to worry about as far as maintaining their business.

No. 3, tax professionals are particularly challenging to vet. There isn't even an ADV2 to read, like there is with financial advisors. And we tend to receive more complaints about this “product line” than any other type of referral we make. It's a real Catch-22 when WCIers ask for them, we eventually find some pros interested in more clients, then the WCIers we send to them complain about the pros. So if you have any good tax pros willing to take on more clients, send them our way.

We will continue to maintain this list of advertisers that we refer to as “tax strategists.” These companies charge more than a typical tax preparation firm. Sometimes, it's a lot more. But for the right person, they are likely to provide far more value than their cost. Within the last year or two, we've also been keeping a list of tax preparers at the same URL. The price, of course, will be much less for that service.

 

What Is a Tax Strategist?

One of the biggest complaints people have about their tax preparer is that they just prepare returns rather than proactively giving tax advice or working hard to reduce the tax burden. People want their accountant to help them reduce their tax burden. They don't necessarily want to pay for that service, though. They figure if they're paying $2,000-$3,000, they should get that thrown in for free.

Well, that's not the way the world works.

Some firms are willing to provide this sort of proactive service. But they charge a lot more than $2,000 a year to do it. The going rate seems to be in the $5,000-$15,000 range and sometimes even more. That's remarkably similar to what you might pay a fairly priced financial planner and asset manager. But the financial planner isn't going to prepare your taxes and may not feel comfortable doing in-depth tax planning. And the tax preparer isn't going to do financial planning, much less asset management.

If you want both services, you may be paying as much as $30,000 a year. And that's a lot of money, even for the average physician who has an income of something like $375,000 a year.

More information here:

You Should Do Your Own Taxes at Least Once – Here’s How I Do Mine

How Investments Are Taxed

 

Do You Need a Tax Strategist?

No, you don't. You don't even need a tax preparer. You don't need a financial planner either. Or an asset manager. Or an estate planning attorney, at least for most estate plans. Or a realtor. You don't need someone to review your contract or help you develop your student loan strategy or coach you through your mid-career burnout episode. You may not need a primary care doc, a gastroenterologist, a mechanic, or a landscaping service either. You can learn to do all this stuff yourself (and skip those colonoscopies), but most of us have decided to outsource a few things in our lives. For some people, a tax strategist is one of those things.

For most of three decades, I prepared my own taxes along with doing my own financial planning and asset management. I read books about how to do taxes. I chatted with experts on internet forums dedicated to lowering taxes. It never seemed to be more than adding a new schedule or two per year, and I could read the IRS publications and instructions and muddle my way through. By the time the WCI staff forced me to quit doing the corporate return, I was doing about $8,000+ a year worth of tax preparation myself. You can do that, too, if you want. Nobody cares about lowering your tax bill as much as you do, and you'll get to know the ins and outs of the tax code and how to apply it in your life. If you're the type of person who will do that, you're probably not going to get $15,000 of value out of a tax strategist. At least not every year.

 

What Kind of Person Will Benefit from Hiring a Tax Strategist?

If you're a resident making $60,000 a year whose only source of income comes on a W-2, you're almost surely not going to find any benefit in paying $12,000 to a tax strategist for tax advice.

But if you're a natural delegator who hates reading about, much less preparing, your own taxes, you and your spouse are both self-employed with a high six- or even seven-figure income, and you are nauseated every time you pay a six-figure quarterly estimated tax bill, then spending a few thousand dollars and a few hours of time with a tax strategist is highly likely to provide more value than the cost. And while the tax code does change from time to time and your tax situation may change from time to time, a great deal of what is done is simply educating you and implementing some changes that will continue forward throughout your career. You don't necessarily have to keep paying that price every year if you don't feel like the value is there.

 

What Is the Truth About Tax Reduction?

Just about everyone thinks they pay too much in taxes. Most of them are right. But there is this idea out there—common among doctors—that if they could just find the right tax preparer, they'd dramatically reduce their tax bill just by filling out their tax forms differently. Many financial professionals take advantage of this belief to sell financial advisory services, real estate, oil and gas investments, whole life insurance, and even tax strategy services. However, that's not really how it works. You reduce your tax bill by living your financial life differently. The big tax reductions come from things like:

  • Earning less money
  • Saving for retirement
  • Moving to a lower tax state
  • Getting married
  • Having children
  • Buying a house with a mortgage
  • Giving to charity
  • Going into business
  • Getting involved in private real estate investing
  • Losing money

It's not about what you put on the forms at the end of the year. It's how you lived your life throughout the year. The tax forms are just a report of how you're living your financial life.

More information here:

How to Use Tax Diversification to Reduce Taxes Now AND in Retirement

 

The Audit Lottery

The easiest way to reduce your tax bill is to be dishonest. The number of people cheating on their taxes, knowingly and unknowingly, is a ridiculously high percentage of Americans. Despite its unpopularity, the best investment our country could make is to dramatically expand the IRS, particularly the number of agents doing audits. While an audit is a pain to go through, honest taxpayers might find their tax bill could drop dramatically without any reduction in government services if the IRS could get all the tax cheats to quit cheating.

However, the truth is that few returns are actually audited—even among high earners—and some things are just a whole lot less likely to be caught than others. So, if you really want to reduce your tax bill, start lying on your tax returns. This is sometimes referred to as the “audit lottery.” Most of the time, you win. Sometimes, you will lose. Not only will you suffer through an audit, but you'll probably end up paying the taxes you should have paid before, plus penalties and interest. Cheat in a particularly egregious way, and you might do some jail time, too.

Even beyond lying, an awful lot of gray exists. Take a common issue for S Corp owner/employees. They have to pay themselves a reasonable salary. For most doctors, a reasonable salary range is well over $100,000. An aggressive tax strategist might take advantage of these sorts of gray areas to try to reduce your tax bill. Maybe it's a relatively new tax deduction that the IRS hasn't said much about, and there aren't very many tax court cases about that deduction. Maybe it's OK, maybe it isn't. If you and your tax preparer/strategist are comfortable playing the audit lottery, there's a fair amount of savings there. But you still have to look at yourself in the mirror the next day.

 

Criticism of Tax Strategists

I occasionally hear criticism about tax strategists and, indirectly, The White Coat Investor for taking advertising money from tax strategists. Sometimes, the criticism is that the tax strategist is overselling their service. For example, maybe the strategist says they're providing a 400% return on your investment in their fees, but a big chunk of that tax savings is just deferring taxes using a solo 401(k) and a cash balance plan. Maybe the actual reduction in taxes paid over the course of your life is much less. Or the critic accuses the strategist of using too many “gray” strategies and playing the audit lottery. One of my favorites was having a financial planner say, “I'll tell you about all these tax strategies for free.” All you had to do was pay the planner $18,000 a year, and you'd get the tax strategy thrown in as a bonus.

The criticism is usually of the marketing of the tax strategizing, but sometimes it is of the strategies themselves, particularly if they seem to be “audit lottery” type strategies. And sometimes the criticism is that using some of these strategies results in a very complicated financial situation that can take a lot of time, effort, and money to unwind if you decide it really wasn't right for you after all.

It's true that you don't have to hire a tax strategist to learn about all of the strategies used by these tax pros. The truth is that, over the last 14 years, I've written at least one blog post about just about all of them. There isn't some super secret formula only available to tax strategists. We can all learn about taxes if we want. But if you don't want to spend time poring over IRS publications and you want some help actually implementing these strategies, paying the strategist might be a very good use of your money.

We have also added a new list to our tax pros page for people just looking for help preparing their taxes who are not interested in paying the fees for a tax strategist. We hope to build that list over the years as well—even if it is much easier to find tax strategists willing to advertise with us. If you just want tax preparation, don't hire a tax strategist.

More information here:

How to Lower Taxable Income

Tax Policies: Enjoy Them But Also Reform the Right Ones

 

What Types of Strategies Might a Tax Strategist Suggest?

WCIers sometimes send me the plans put together by their tax strategist and ask me my opinion about the various strategies suggested. So, I'm pretty familiar with what they are. Here are a few examples, along with links to posts I've written about them. I'll group them into various categories. Note that not all strategies are right for all people at all times in their lives and that some of these definitely fall into the audit lottery category.

 

Save for Retirement

  1. Do a personal and spousal Backdoor Roth IRA each year.
  2. Do Roth conversions.
  3. Use multiple 401(k)s/403(b)s.
  4. Do Mega Backdoor Roth IRA contributions.
  5. Take advantage of catch-up contributions.
  6. Get a customized solo 401(k).
  7. Open a defined benefit/cash balance plan.
  8. Tax-loss harvesting.
  9. Tax-gain harvesting.
 

Give to Heirs

  1. Use UTMAs for children.
  2. Overfund 529s for college savings for multiple generations.
  3. Use estate tax-reducing strategies like SLATs and family limited partnerships.
 

Structure Your Business Properly

  1. File taxes as an S Corp.
  2. Use an HSA or 401(h).
  3. Hire your children.
  4. Hire your spouse.
  5. Use contractors instead of employees.
  6. Become a contractor instead of an employee.
  7. Have your business rent your house for 14 days a year.
  8. Use a home office.
  9. Track business mileage or have the business own vehicles.
  10. Form a C Corp to administer services to your main business and add some fringe benefit plans.
  11. Stop paying for what are completely or partially business expenses with personal money.
  12. Form a captive insurance company.
  13. Restricted property trust.
  14. Business-owned cash value life insurance.
  15. Optimize the 199A deduction.
  16. Have your business pay your state taxes (PTET).
 

Invest in Private Real Estate

  1. Use depreciation to shelter equity real estate income from taxes.
  2. Accelerate depreciation using cost segregation studies.
  3. Acquire Real Estate Professional Status (REPS).
  4. Take advantage of the short-term rental loophole.
  5. Exchange rather than sell properties.
 

Invest in Oil & Gas/Minerals

  1. Use depletion to offset tax liability.
 

Buy Exotic Tax Credits (Often an Audit Lottery Strategy)

  1. Purchase tax credits from Native tribes for dimes on the dollar.
  2. Conservation easements.
  3. Buy products (often via a private investment partnership) at wholesale and donate them to charity, claiming a much higher retail price for the deduction.
 

Give More to Charity

  1. Direct donations.
  2. Donor Advised Funds.
  3. Charitable Trusts.
  4. Charitable annuities.

 

As you can see, there are a plethora of potential tax reduction strategies that a strategist might suggest for you. I've been writing articles and podcasting about this stuff for years. Here are a few of those articles not linked above:

Tax strategizing is a good idea, whether you hire someone from our recommended list or do this yourself. Let us know how your experience is when you work with our advertisers, as that feedback helps us to assist them in serving WCIers better or, rarely, to trim them from our lists.

What do you think? Have you ever hired a tax strategist? Did you find it valuable?