6 Tips for Finding the Tax Advisor Who Can Help You Achieve Your Financial Dreams

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How choosing the right partner can save business owners millions

Smart tax decisions can often save business owners millions of dollars over a lifetime. And that makes partnering with an exceptional tax advisor one of the most important steps you can take to protect and grow your wealth.

Great tax advisors don’t simply do the taxes for your business once a year. They advise you on its structure and meet with you regularly to strategize the right approach that helps you achieve your financial dreams. They don’t just record the history that you give them every tax season; they help you chart a path toward a better future that significantly minimizes your tax burden to Uncle Sam.

More than 74,000 pages comprise the complex and ever-changing U.S. Tax Code, and the Washington Examiner projects that it will exceed 100,000 pages by 2050 if it continues to grow at its current pace. Buried in all that text are tax breaks and legal strategies the average American is likely to miss without a skilled tax advisor. It’s also easy to make filing mistakes that can land you in hot water without guidance from someone who is up on the latest ins and outs of the law.

Great tax advisors can steer business owners toward money moves with the most tax advantages in vital areas like retirement, estate planning, small business planning, and investment management. And they can make sure you don’t leave money on the table during major life events like a marriage or the purchase of a home.

Here are six tips for choosing an exceptional tax advisor who will help you maximize your wealth by minimizing your taxes:

  1. Don’t become another number to a mass-production company. The best tax advisors are certified public accountants. Not only must they pass tough licensing exams, but their certification must be renewed periodically, ensuring that their expertise and training is up-to-date. CPAs are the most knowledgeable about reducing taxes, and more passionately dedicated to saving you money in the long-term than a mass-production tax company that thrives on volume during tax season.

    Good CPAs don’t merely read your company’s numbers; they take the time to explain them and make recommendations about the health of your business. They also are the only tax professionals certified to perform the most complicated tax-related tasks, like audits.
  • Make experience a priority. While newly-minted tax advisors may be smart, experience can make a big difference in long-term tax savings. There’s no denying the benefit of hiring an advisor who has successfully gone toe-to-toe with the IRS, or who has worked with enough clients to be familiar with your circumstances and the unique issues they may bring. If you are offering stock options, for instance, it’s wise to choose a tax advisor who has already helped other companies through the process. While there’s no magic number when it comes to years of experience, you need to assess whether the advisor you choose has the background to handle the complexities of your needs.
  • Learn to think outside of the box. The best tax advisors don’t simply rely on the most straightforward tax savings. In fact, warning bells should go off if you are the one asking all the questions during your initial interview. An exceptional tax partner invests time into initially understanding your goals. Then they will meet with you regularly to help you develop a lifelong tax strategy based on creative and legal ways to achieve permanent savings.
  • Do your homework. It’s essential to vet potential advisors properly. Shady, fly-by-night tax preparers pop up during tax season and then disapper – leaving you on your own to handle problems. Be sure to ask for professional credentials and references from any tax advisor you consider. Any of those who can’t deliver should be cut off your list.
  • Trust your gut. Recommendations from friends and colleagues can be a great start to finding an exceptional tax advisor. But at the end of the day, no one’s tax needs are exactly the same and it’s most important that you can establish trust and build a good working relationship with the advisor you hire. If you feel concerned, alarmed, or inferior after the first meeting, or you are worried that the firm is too busy to assist you, you should keep looking for other candidates. It’s never wise to hire someone hoping communication will improve after you begin working together, no matter how highly recommended they are.
  • Mirror your tax philosophy. If you want to deduct everything you can but your tax advisor is conservative and worries about IRS audits, you probably don’t share the same tax philosophy. Or perhaps you fear the IRS but your advisor is pushing aggressive deductions. There might be room for compromise if you are willing to entertain each other’s ideas. But the bottom line is that you are paying for a service – and you have to be comfortable with the tax philosophy and tax advisor you choose.

Maybe your business isn’t set up in the most tax-efficient manner. Maybe you’re holding your asset classes in the wrong accounts. Or maybe you fear that you’re paying money to the government that rightfully belongs in your pocket.

Hiring an exceptional tax advisor is one of the most important decisions you’ll make as a business owner. A true tax partner will take time to educate you about the rules while helping you uncover all the credits and deductions you deserve. By doing your research, you will find the advisor who understands your long-range goals and uses the nuances of the law to potentially save you millions over a lifetime.

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact in their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning, and to find out how we can help your business exceed your expectations.

How to Avoid Choosing the Wrong Tax-Advantaged Retirement Plan

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There’s no one right way to save for retirement. Weigh the pros and cons of each type of account. Then do the math to figure out which one will save you more tax in the long run.

There are many retirement savings accounts out there that offer tax savings and substantial long-term asset growth. But they’re not all equal. Choosing the wrong fit for you could end up complicating your retirement withdrawals and making your tax requirements more expensive in the long run.

The main two ways you can save tax on your investments are to either 1) pay less or 2) pay later. Many investors keep their high-income investments in taxable accounts, even though they’re also investing in tax-deferred accounts. By combining the high-income investments into the tax-deferred accounts, tax savings can be much higher.

But deferring tax can actually lead to problems, too, including:

  • Income is taxed at standard rates, so you won’t see lower rates on your long-term capital gains.
  • There isn’t the chance to profit from stepped-up basis when you die (when an asset’s worth can increase based on market value at your death).
  • Penalty taxes apply to withdrawals before you’re 59 ½. 

Keep in mind that retirement accounts are (spoiler alert!) meant for use in retirement, and not primarily for their tax-deferred benefits.

You can avoid the tax penalty for early withdrawal if certain conditions apply. These include:

  • Health insurance payments if unemployed
  • Medical expenses
  • Higher education expenses
  • Buying a home for the first time
  • Separated from service and 55 years-old
  • Qualified domestic relations order
  • Permanent and total disability
  • Death

Let’s take a look at the different types of retirement accounts and their various tax rules.

Traditional IRAs, 401(k)s, and the like

Common retirement savings accounts are individual retirement accounts (IRAs) which allow you to deduct contributions and account fees (as long as you don’t pay them with plan assets), and you can compound your earnings for retirement.

IRAs are tax-deferred accounts. You can contribute regular income, other savings, or sometimes even borrowed money. But deposits have to be cash – you can’t, for instance, transfer securities from other accounts unless they’re rollover contributions.

The types of investments you can hold in your IRA are many. These can include:

  • Cash
  • Stocks
  • Bonds
  • Mutual funds
  • Partnership interest
  • Real estate
  • Mortgages

The downside is that any withdrawals before you reach age 59 ½ are subject to a tax penalty of 10%. After you hit that age, you can withdraw your funds as if they are your income, but you must start these withdrawals by age 70 ½. These withdrawals are fully taxable, unless your initial contributions were after-tax.

Other types of accounts are the spousal IRA and nondeductible IRAs. If you are or have a nonworking spouse, a spousal IRA is an option. Your IRA contribution subtracted from your combined income must be enough to cover the nonworking spouse’s contribution.

If you don’t qualify to deduct annual contributions, you can have a nondeductible IRA. This type of account allows you to withdraw funds, a portion of which will be tax-free. But keep track of contributions that have already been taxed – what you can do is add up all your nondeductible contributions, and divide that sum by the total of all your IRA account balances.

If you really need regular income before you hit the minimum age for withdrawal, you can annuitize your account, which provides you a string of equal payments. These payments continue until you’re age 59 ½, or for five years. To calculate these equal withdrawals, you can use the life expectancy method (divide your IRS life expectancy by current account balance), and the amortization method (divide your insurance life expectancy by current account balance).

You’ll also have to calculate your minimum required distributions each year after you hit age 70 ½. You do this by dividing the previous year’s account balance (as of December 31st) by the distribution period of your age.

This is very important because if you miss a required distribution, you will likely have to pay a tax of 50% on the amount you should have distributed.

Note that many people try to defer tax as long as possible by waiting to make withdrawals until they are absolutely required to. The problem with this strategy is that if, for example, you take your first and second required distribution in the same calendar year, your adjusted gross income (AGI) will increase and you may be pushed into a higher tax bracket.

Roth IRA

The Roth IRA is a popular option because withdrawals are generally tax-free, but contributions aren’t deductible. You can participate in these accounts whether or not you are also in an employer plan, and your AGI must be less than $131,000, or $193,000 if you file jointly.

Qualified rollover contributions to your Roth IRA are allowed, regardless of your AGI. As with traditional IRAs, contributions must be made in cash. After you reach age 59 ½, you can start withdrawing funds and you won’t have to pay tax on that income.

Aside from the big tax-free withdrawal perk, other benefits include:

  • There are no required minimum withdrawals on Roth IRAs like there are with regular IRAs.
  • Distributions are not included in your provisional income, which determines Social Security tax.
  • Your AGI won’t increase because of Roth IRA distributions when calculating PEP and Pease phaseouts.
  • If you see a loss in your Roth IRA, you can liquidate your account and deduct the loss as a miscellaneous itemized deduction.

As far as conversions, keep in mind that if you convert your traditional IRA to a Roth IRA, your income may increase and thus your tax bracket. You could also see more tax on Social Security and Medicare benefits by converting, and it may affect college financial aid.

The 3.8% unearned income Medicare contribution on investment income may apply if you convert. And finally, when you recognize income from a Roth IRA conversion, you may be subject to alternative minimum tax.

It’s not always easy to choose which kind of retirement account is right for you. When you understand the benefits and downsides of more traditional IRAs and Roth IRAs but are still unsure about which to choose, our team can help. Contact Provident CPA and Business Advisors today. We can provide the advice you need to create a retirement savings plan that meets your tax needs.

Investments that Give You the Biggest Tax Breaks (Part Two)

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Tax-advantaged income generators offer major benefits to sophisticated investors

When it comes to investing, the returns you make aren’t all that matter – the endgame is also about how much cash stays in your pocket after taxes.

In the first installment of our two-part series on investments that offer the biggest tax breaks, we considered several insurance products that can help you achieve your retirement goals with major tax advantages. Now we will explore tax-advantaged income generators that offer a significant opportunity to manage, defer, and reduce how much of your cash is claimed by Uncle Sam.

Investing tax efficiently doesn’t have to be complicated, but advanced tax planning allows you to be strategic about the opportunities you choose to build wealth. While investment strategies shouldn’t be based solely on taxes, the better your tax awareness, the better your returns are likely to be.

Congress eliminated most classic tax shelters in the ‘80s, but a new breed of tax-advantaged income generators has emerged that offer a legal way to lower your taxable income. Top among these choices are investing in oil and gas, equipment leasing, and master limited partnership programs.

These investments take advantage of partnership tax benefits and depreciation deductions to pay substantial tax-advantaged incomes. And while they are subject to the passive loss and at-risk rules intended to bring a screeching halt to 1980s-style tax shelter abuses, they offer solid tax benefits to investors willing to consider more sophisticated investment opportunities.

  • Oil and gas. Investors looking for tax-advantaged income combined with potential capital appreciation can reap significant rewards from oil and gas programs. The value of your investment is directly linked to the value of the oil in the ground, adding diversity to your investment portfolio.

So many tax breaks are available to the oil and gas industry that Investopedia writes, “No other investment category in America can compete.” The U.S. government is so committed to developing its domestic energy infrastructure that some programs offer enough deductibles to write off your entire investment in the first year – providing a valuable way to offset capital gains from the sale of other investments.

There are also no income or net-worth limitations, other than a small producer limit to qualify for a depletion allowance. That means even the wealthiest investor can invest in oil and gas and receive these extraordinary tax benefits as long as they limit their ownership to 1,000 barrels of oil per day:

  • Intangible drilling and development costs are 100 percent deductible, including labor, fuel, supplies, and any other expenses of drilling a well. These expenses generally comprise up to 80 percent of drilling costs – meaning if intangible costs are $300,000, a whopping $240,000 could be deducted in the year they’re incurred. This is true even if the well doesn’t produce or strike oil. This generous deduction is also exempt from serving as a preference item on an alternative minimum tax return.

    • Tangible drilling costs – generally the equipment used to extract resources – are also 100 percent deductible but must be depreciated over seven years.
    • Interest you pay to finance the program is deductible.
    • Small companies and investors can exclude 15 percent of gross income from oil and gas wells as a “depletion allowance” – a nod to the economic reality that the well will eventually run dry.
    • Lease costs can be deducted over the life of the lease through the depletion allowance, including the purchase of lease and mineral rights and lease operating costs.
    • A working interest in an oil and gas well is considered an active activity, not a passive one. That means all net losses are active income and can be used to offset other forms of income, including interest and capital gains.
  • Equipment leasing. Investors join together in equipment leasing programs to purchase assets or equipment ranging from machinery to ships that they can lease to interested parties. The investors receive any income that’s generated, along with generous depreciation deductions that shelter your earnings from income tax.

Thanks to accelerated depreciation rules, you can front-load your deductions to achieve the biggest savings during the first years of ownership. This depreciation combines with upfront costs and interest on any borrowed capital to shelter your income for the first years of the lease.

The new tax code makes this program even more attractive, making more properties eligible for quicker depreciation and offering more flexibility in deciding which depreciation options to use. For instance, new bonus depreciation rules enable you to immediately deduct 100 percent of the cost of eligible property as an expense in the year it’s placed in service through 2022.

  • Master limited partnerships (MLP). Put simply, MLPs are publicly traded limited partnerships that combine the tax benefits of partnership with the liquidity of a public company. Many are involved in real estate or finance, and the biggest ones focus on the transportation of fuel.

MLPs don’t pay tax themselves – rather income and deductions “pass through” to the investors who own them. That means many are eligible to reap the rewards of the tax code’s new 20 percent pass-through deduction – the most significant tax break to small business owners in decades.

This partnership structure also helps investors achieve higher yields by avoiding the double taxation that plagues corporations. When this occurs, the business pays corporate income tax and then shareholders also pay personal taxes on income from their stocks.

Depreciation and depletion deductions are passed on to the limited partners as well, further reducing their taxable income. Another major tax advantage is that quarterly distributions are treated as a return of capital instead of income, enabling investors to avoid paying income tax. In fact, most earnings are tax-deferred until the units are sold, and then they’re taxed at the lower capital gains rate instead of an investor’s higher personal income rate.

Tax efficiency is essential to maximizing returns. Tax-advantaged income generators offer a legal way to shelter all or some of your investment income from taxation – minimizing your tax burden and increasing your net returns. The complexities of investing and the new tax laws make it difficult for most people to understand which products are best suited to helping them achieve their financial goals. A qualified financial advisor can help you select the right kind of investment to grow your wealth while keeping as much as you can in your pocket instead of Uncle Sam’s.

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact in their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning, and to find out how we can help your business exceed your expectations.

How to Avoid Overpaying Tax on Mutual Funds

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Mutual funds can be taxefficient investments – that is, as long as you are aware of the strategies necessary to avoid overpaying the IRS

Investing in mutual funds is a way for investors to pool security ownership with other investors. But when you’re considering taking advantage of the benefits of mutual funds, make sure you don’t overpay in taxes. Here are certain funds to consider and behavior strategies to follow that will ensure you maintain tax-efficient investments:

Tax-efficient funds

First, let’s look at index funds. This type of mutual fund passively matches or tracks a market fund, such as the S&P 500. But unlike actively managed funds, therules and selections don’t change based on what the market does. Not investing directly in the market has many benefits, such as low operating costs and low portfolio turnover. Because of this low turnover, these investments are tax efficient and less expensive to manage than actively managed funds, which investors frequently buy and sell. Plus, index funds are diverse, so your funds are spread out and betterprotected from big losses.

An exchange-traded fund (ETF) is a type of index fund which trades on a major stock market, like the New York Stock Exchange. ETFs are generally investments with lower risk and lower costs, and are bought and sold throughout the day like stocks, meaning investors can place different types of orders. (Mutual funds, on the other hand, settle when the market closes.) Costs are lower because there’s no sales load, though you will pay commissions. But the better tax efficiency comes from investors being able to control when the capital gains tax is paid.

Another type of tax-efficient mutual fund is a tax-managed fund. These funds help reduce the amount of capital gains tax you pay by harvesting losses to offset gains. You see capital gains either by selling shares or by receiving embedded gains, which happen when the fund sees a gain from the sale of a share and that gain is passed to you as share holder. Tax-managed funds aim to reduce that second type of gain that you’ll have to pay tax on, whether by harvesting losses (mentioned above), avoiding turnover, or selling certain shares to minimize taxable gains.

Basically, you control when you realize your capital gains. And in some instances, thesefunds may have early-redemption fees that deter withdrawals which could forcemanagers to sell and thus see capital gains.

The last type of investment worth mentioning is a separately managed account (SMA). These accounts differ from mutual funds in that you have an account manager who directs securities that you own on your behalf. SMAs can help you avoid turnover and you may see opportunities to take advantage of tax swaps. Just keep in mind that the fees on SMAs could be a bit higher than mutual funds.

Tax-efficient behavior

You want to ensure that your investment behavior actually takes advantage of the tax benefits you can see from the above types of funds. Many investors don’t fully understand the tax implications of mutual funds, The New York Times notes.

First, try to avoid large lump-sum distributions. For tax-deferred accounts, like retirement accounts, you’ll see a big tax bill if you opt for one large lump-sum withdrawal. Instead, try rolling the money over or spreading out the distributions over several years.

Also try to limit the amount of turnover on your mutual funds. When you trade frequently, the capital gains you see may be subjected to high income-tax rates, instead of better long-term capital gains tax rates.

When applicable, try tax loss harvesting, or tax swaps. This strategy allows you to use capital losses (when you sell a fund for less than you bought it) to offset any capital gains. This can help you reduce or manage your tax bill from capital gains.

Keeping dividend payout timing in mind is another important strategy to manage taxes. The capital gains you accrue throughout the year are paid out as the end of the year is nearing. Avoid buying shares right before that happens, since you’ll have to pay taxes on gains before you may see any profit from the shares. In contrast, selling shares before the dividend date can help you avoid overpaying on tax by avoiding higher ordinary income tax rates versus capital gains tax rates.

When you’re ready to look at your investment portfolio with an experienced financial professional, Provident CPA andBusiness Advisors is here to help. We ensure you pay the least tax legally possible and help you create a diverse and balanced investment portfolio. Get in touch with our team today to learn about how we help our clients create investment strategies that work.

How to Avoid – or Reduce – Capital Gains Tax

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Capital gains tax doesn’t have to overshadow your profits.

Capital gains are profits you see from the sale of assets and investments, such as stocks and bonds or real estate. Any capital losses you experience each year are offset against these gains.

Capital gains tax is the tax you must pay to the IRS on profits made after the sale of these assets, and may apply regardless of your tax bracket. This type of tax is capped at 20 percent, but you can end up paying more if you’re not careful.

You’ll first need to figure out your capital gains by determining the adjusted selling price. This is calculated by determining the cost of the sale, including commissions, and your basis, which is the purchase price, sales, tax, improvements etc., and subtracting it from the sale price. This difference is the capital gain.

This is important to remember, since many people think they’re going to be taxed on the full sale price of an asset; for example, the sale of a house.

Here are strategies you can use to reduce or avoid capital gains tax:

Wait longer than a year to sell

Short-term gains are those from property held within a year, and the tax rate is what you pay for income tax. Long-term gains are from property held over a year, and tax is generally less than the short-term gains tax.

So, if you hold off on selling longer than a year, until your gains will be considered long-term, your tax rate will probably be lower than your marginal tax rate.

Leverage capital losses

As mentioned above, capital losses offset capital gains in a given year. Thus, if you time these out to complement each other in the same year, you can reduce your capital gains tax. Be aware of limits, however. All capital gains have to be reported, but you can only take $3,000 of net capital losses each tax year. Any additional losses may be carried over into the future years.

Tax-engineered products for stock sales

You can convert stock gains into cash with tax-engineered products, thus protecting those gains and deferring tax. This avoids the tax you would be required to pay if you sold them outright.

Stock loan programs and stock collars, or hedge wrappers, allow you to borrow against your stock; variable prepaid forwards let you to sell your shares in the future in exchange for payment now; and swap funds enable you to diversify your portfolio by making tax-free exchanges of assets into partnerships with other investors.

The charitable trust for real estate or securities

Another way you can avoid tax – on real estate, businesses, or securities – is with a charitable trust. How it works: you will split your assets into two different portions. One will be your income for your lifetime or up to 20 years, and the rest will be given to charity.


The charitable remainder trust (CRT) is the most common type. Another beneficiary, or other beneficiaries, will establish the trust with you, and you can put your mutual funds, stocks, or real estate into the trust. This gives you a deduction right away that is equal to the value of the remainder interest you have to give, and your age, income interest, and the current section 7520 rate from the IRS each month determine how it’s calculated.

A big benefit is that the gift you make is no longer part of your taxable estate. Appreciated assets are sold by the trust, and there’s no tax due on your capital gains. The assets are then reinvested by the trust in a diversified portfolio.

You will then be paid from the trust – either via a percentage of the assets in the trust or a specific dollar amount. Anything left over in the trust goes to charity when you die.

A charitable lead trust, on the other hand, gives income to the charity, and the remainder goes to you and your beneficiaries.

Note the PEP and Pease limits

Gains that reach above certain thresholds of adjusted gross income (AGI) can see certain limits – the personal exemption phaseout (PEP) limit reduces personal exemptions, and the Pease limit caps itemized deductions. These limits phase out tax breaks like medical deductions, child tax credits, American Opportunity and Lifetime Learning Credits, and the rental real estate loss allowance.

These limits can also increase your provisional income to determine what your tax will be on Social Security benefits. These break phaseouts force you to recapture some of the depreciation on your assets you’re selling, and recaptured depreciation tax is 25 percent for depreciation and real estate.

One of our focuses at Provident CPAs and Business Advisors is ensuring our clients pay as little tax as legally possible. Contact us today to learn about our tax minimization services.