What about the Tax Code?
Now I want to walk through how the tax system works, in order to build a foundation for understanding how tax planning works.
Most people would look at the tax code and see thousands of pages of gobbledygook. But there really is a certain logic to it that jumps out if you look hard enough.
I want you to see the tax code as a series of red lights and green lights. The red lights are where you have to stop and pay tax; the green lights are where you go without paying.
Red Lights
So, Internal Revenue Code Section 1 says, “there is hereby imposed . . . a tax determined in accordance with the following table,” and sets out the familiar rates we all know and love. That’s a red light: stop and pay tax. Section 1401 outlines the self-employment tax rules and rates. That’s another red light: stop and pay the tax. Section 1411 outlines the new net investment income tax rules that came in with the Affordable Care Act. Another red light: stop and pay tax.
Green Lights
But very quickly, the code runs out of red lights, and starts including green lights. These are places where you can go, without paying tax. These are just a few examples. Section 105 makes employer health benefits deductible to employers and tax-free to employees. Section 170 makes charitable gifts deductible, at least for those who itemize. And Section 7702 is what makes cash-value life insurance such a great retirement planning tool.
Here’s the Bottom Line
Most tax professionals are so busy “doing taxes,” they focus on the red lights. And that’s important, because blowing through the red lights is what gets you in trouble! But they don’t take the time, and in many cases don’t have the specialized training, to look for the green lights that can help you pay so much less. Looking for the green lights – and implementing strategies to take advantage of those green lights – is what separates planning from projection.
Finally, consider this. Sometimes you have to stop at a red light. But then you can turn right. So proactive tax planning also involves finding opportunities to turn right where other tax professionals simply stop.
So, planning is all about the search for green lights that let you go without paying tax. Those green lights we’re going to talk about fall into one or more of four buckets:
Timing–based strategies, like using 401(k) deferrals to shift the tax on the deferred income until you take it out of the account.
Shifting-based strategies, like hiring your children to work for your business and shift that income to their lower bracket.
Code-based strategies, like a medical expense reimbursement plan that may let you deduct your family’s medical bills as a business expense, and
Product-based strategies like separate-managed accounts and insurance and annuities.

Now that we know what our goal is – to find and cash in on the tax code’s green lights – let’s take a look at how the process works.
It’s really a lot like going to the doctor. If you’re sick, and you visit the doctor, typically three things happen:
- First, the doctor examines you and diagnoses the problem. Does your stomach hurt? Maybe it’s food poisoning. Maybe it’s something more serious like pancreatitis. Maybe it’s really bad and it’s cancer. Regardless, the doctors has to figure out what the problem is before they can solve it.
- Next, the doctor prescribes the solution. What’s it going to take to fix the problem?
- Finally, someone has to fill that prescription. That might involve a trip to the pharmacy for medication. It might mean surgery. It might mean physical therapy. But if the problem is serious, it’s not just going to fix itself.
The tax planning we do for you follows that same model.
- The “diagnosis” takes the form of looking over your business and personal tax returns, along with any supporting documents like investment portfolio statements. We’re going to ask you a series of questions about your goals and resources. Then we diagnose any mistakes and missed opportunities that might be costing you taxes that you shouldn’t have paid.
- The prescription takes the form of a Tax Planning Outline that introduces you to the green lights you’re missing.
- Finally, the Tax Implementation Process “fills the prescription.” This includes the implementation guides, checklists, forms, and templates, and referrals to specialists that you need to put the strategies to work, document them properly, and audit-proof your returns.