Aggressive or Defensive Tax Planning….which is appropriate!


This year is the 100 year anniversary (1913 – 2013) of the creation of the US Federal Income tax. There will no big parties or celebrations as what began as a limited tax on income has grown into the burdensome and complex world of funding our government’s spending.

The original tax rates ranged from 1% to 7%.  If we adjust the brackets for inflation the top bracket would be applied today on income above $500,000 with a tax of 7%.  It is ironic that this week our Fiscal Cliff will be averted if we increase taxes on those making $450,000 to about 40%.  Taxes on corporate dividends were exempt in 1913 and now will be taxed at 20% in 2013.  Clearly the chunk of our earnings that are siphoned off through federal income taxes has increased greatly over the past 100 years.  Add to that state, local and payroll taxes.

When I was practicing as a CPA in my first 20 years and specifically growing my knowledge of US Federal Income tax laws, I often heard the phrase “Aggressive Tax Planning”.  Typically this was in reference to taxpayers who wanted to use anything legal, maybe legal or borderline or flat out illegal to not pay taxes.  This era gave birth to tax shelters, off shore tax scams and other techniques to facilitate this aggression against the government’s imposition of taxes on income.  Some of the plans were not investments but creative ways to shelter far more income than was invested.

Some promoters of these schemes were jailed, many people lost their “investment” and being “aggressive” became a target for IRS rules, laws, audits and litigation. The IRS now demands that taxpayers and tax preparers disclose any aggressive tax treatment they are using right on the tax return. Can you say raise your hand and ask for an audit…and penalties!

Often I would have new client come to the first appointment with me and let me know they wanted me to help them be “aggressive” with creative ways to eliminate all taxes.  They usually “knew” someone who didn’t pay any taxes on any of their income.  I have never met anyone who did not pay taxes and I have worked with thousands of clients and hundreds of CPAs, attended seminars and read nearly every tax avoidance book I could get my hands on.  These mystery individuals, who don’t pay taxes, don’t exist.  Some may pay less than others, but everyone I ever met pays some taxes.

I informed my clients that I was a “defensive” tax planner; I would help them create ways to defend their income from the federal income tax siphon. My goal was to find whatever legal way we could to lower taxable income and the related tax, by means that were within the tax code.

Today is January 1, 2013 and I know with a high degree of certainty what my 2012 income tax return will reflect.  I always plan my taxes throughout the year.  In the final week of the year, I update my income and deductions and compute the amount of tax for the year and what estimated payment I need to make on January 15th.

This year I noted that a fuzzy tax concept called the Alternative Minimum Tax (AMT) is growing in my total tax computation.  This year that tax on AMT Income rose from less than $100 to almost $9,000.  That is during a year when my taxable income went DOWN.  Why did this happen?  Well the exemption for AMT dropped from about $80,000 to $45,000 this year.  That means more of the income computed under this 26% rate alternative was subject to tax and raised my effective tax rate over last year.  Standard Federal Income Tax rates did not change this year…..but I am paying more effectively.

The top federal income tax rate when I entered public accounting in 1979 was 70%.  That is effectively increasing to 39.6% in 2013 over 2012.  But in addition there is another AMT (Additional Medicare Tax) that will impact those high bracket earners.  This is the new Obamacare tax of 3.8% that effectively drives the rate to 43.4% at the highest taxpayer level of income.

We always fear things we can see coming at us but we have time to adjust and protect when possible. In reality the things that come from the sides or behind us can do more damage.  Tax rate increases are coming from all kinds of sources.  Personal tax preparation tax software programs have deluded some individuals to think they don’t need an experienced CPA as their tax advisor.

Although I keep current with tax laws, I no longer offer tax preparation services, with the exception of some friends and family.  I strongly suggest as we continue into the next 100 years of federal income taxes in this nation that you employ a seasoned tax expert to help you legally defend your income from the attack of the numerous ways that are being created to tax you.


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