Which Tax Do you want to Avoid?

There are many taxes levied by Federal, State, and Local Governments. Some of the more significant ones are listed below. In general, they fall into four major categories, Income Taxes, Payroll Taxes, Property Taxes and Consumption Taxes.

Some Significant Taxes Levied by U.S. Taxing Authorities

Income Tax                               Estate Tax                     Social Security Tax                    Property Tax

Capital Gains Tax                       Gift Tax                         MedicareTax                            Sales Tax

Dividend Tax                             Generation Skipping Transfer Tax

In this article we will concentrate on avoidance of the primary taxes involved with Investing:  Income Tax, Capital Gains Tax, and Dividend Tax. We can deal with the other taxes in future discussions.


Remember  … “Tax Avoidance is Legal, Tax Evasion is a Crime”

Income Tax regulations, formally known as the Internal Revenue Code (IRC), are set forth in Title 26 of the Code of Federal Regulations (CFR) also referred to as the U.S. Code. They have the force of law.

You are encouraged to take advantage of every method allowed in the IRC to reduce your tax liability but you are discouraged from using questionable methods to avoid responsibility for paying your fair share of taxes. This may put you in a difficult position with the Department of Justice which may prosecute you for breaking the law.

If you are in doubt please consult with a qualified Tax Professional, either a Certified Professional Accountant (CPA) or an IRS Enrolled Agent (EA), who should be able to give you sound guidance.

Account Registrations and Structures

Qualified Plans

They are “Qualified” by the Internal Revenue Code (IRC) which specifically defines their attributes that give them their special tax protected status. Plan numbers such as “401k” refer to the specific section in the IRC which defines that type of plan (i.e. Section 401, paragraph k).

The general purpose of these plans is to allow individuals to put away funds, including investment gains, that are Tax Deferred until they are distributed. Individual plans are non-employee plans where the contribution is a tax deduction on the individual Income Tax Return in the year it is contributed.  Defined Contribution Plans are for earned income that can consist of Employee contributions, in the form of salary for wage deferrals and Employer contributions in the form of matching contributions or profit sharing contributions. Defined Benefit Plans are funded solely by Employers and consist mostly of the traditional Pension Plans that we know of.

Roth IRAs are a special type of plan in which contributions are made after tax are paid but can be withdrawn as Tax Free, including investment gains, after the required minimum age is attained.

Some Common Qualified Account Types

Individual Plans                        Defined Contribution Plans                  Defined Benefit Plans

Traditional IRAs                        401k, 403b, 457 Plans                           Company Pension Plans

Rollover IRAs                            SEP, SIMPLE, SARSEP Plans                    Government Pension Plans

Beneficiary IRAs                        Profit Sharing Plans                               Union Pension Plans

Spousal IRAs

Roth IRAs

529 College Savings Plans – Contributions are made with after-tax funds but can be distributed Tax Free, including investment gains, if they are made for IRC qualified expenses (tuition and fees).

Health Savings Accounts (HSAs) – Contributions are made with before-tax funds for individuals with high deductible Health Care Plans but can be distributed Tax Free, including investment gains, if they are made for IRC qualified health care expenses.

Charitable Remainder Trusts – Highly appreciated assets can be donated to Charity with a deduction for their full value in exchange for a lifetime income. This technique can convert a large, current capital gains tax liability to an income tax liability and stretch it over a long period That is Tax Deferred.

Irrevocable Life Insurance Trusts (ILITs) – are used to for Estate Tax avoidance for large estates. It essentially gifts current tax premiums and multiplies those into a future insurance Death Benefit which will pass Tax Free to the beneficiaries.

Transactional Techniques

Tax Loss Harvesting.  Not all investments make money. However The IRC allows individuals to take a Tax Deduction for investment losses against investment gains in the year they are sold as well as some income. A professional Investment Manager should be able to identify and maximize these opportunities through sophisticated portfolio management software.

Donation of Appreciated Stock.  Investors can attain concentrated positions in highly appreciated stock, which they are discouraged from selling because of a significant tax liability associated with the sale.  The IRS allows the individual to donate the stock to a qualified charitable institution and take a large charitable Tax Deduction of the entire market value of the stock including the capital gain. This may calculate out to a better financial outcome than paying the capital gains tax on the appreciated value. It is also certainly better than donating cash to charity because of the capital gains tax avoidance feature.

Product Type Characteristics

Certain investment types have their own unique tax avoidance features:

Municipal Bonds – Interest payments are Tax Free at the Federal level and but also at the State level if the investor files tax returns in that state.

Qualified Dividend Income – Dividends from IRC qualified investments are taxed at a Flat Rate of 15% which may be far less than the tax rate paid by Investors with higher incomes.

Real Estate – has the advantage of depreciation deductions that can be taken against income which can decrease the tax liability. This tax protection also extends to Real Estate Investment Trusts (REITs), Limited partnerships, and other fractional ownership programs. This makes the investment income Tax Deferred. This depreciation deduction may have to be recaptured when the property is sold however this can be avoided for some properties by using a 1031 property exchange to a new investment property which can further defer the tax liability.

Annuities – have special tax advantages in the IRC which allows investment gains to be Tax Deferred until distributions are made from the Annuity. Annuities also come with features that can guarantee either future Income Benefits or future Death Benefits. Income Tax free transfers to better Annuities are also allowed.

Life Insurance – also have special tax benefits which allow gains in the contract to accumulate tax-free. Death benefits from Life Insurance policies are Tax Free but may be subject to Estate tax.


Tax Avoidance strategies take careful planning and construction to work effectively. You should seek out a qualified Financial Professional (CFP) and consult your Tax Professional (CPA) to help ensure the most desirable outcome.

Read More About Our Service


Views, opinions and analyses expressed in this presentation are those of Southwestern Retirement and not those of Independent Financial Group, LLC.

Registered Representative offering Securities and Advisory Services through Independent Financial Group LLC,

a Registered Broker-Dealer and Investment Adviser. Member FINRA/SIPC.

 Southwestern Retirement Planning Advisors, Inc. is not affiliated with Independent Financial Group LLC.

OSJ Address: 4041 MacArthur Blvd., Suite 240, Newport Beach, CA 92660