Exploring Aggressive and Controversial Tax Strategies
As we inch closer to the end of the year, you might find yourself surrounded by advice on how to cut down your tax bill. If you’ve been on social media lately, you’ve probably spotted some “interesting” tax strategies floating around. In fact, there’s a term we like to use for this period—the “tax crazy idea time.” This is when clients approach us after seeing some tax trick online, thinking they’ve struck gold and we need to step in to bring them back down to earth.
Some of these tax ideas are entirely legitimate—really, you could argue that all of them are—it’s just that some are abused or stretched a little too much. The key for you, as a taxpayer, is knowing where the line is drawn. Today, we’ll walk through some of the most common ones, break down the do’s and don’ts, and explore why you should be cautious with each.
🎥 Prefer video over the blog? We’ve got you covered!
Watch our YouTube video as we dissect this blog post for you 🎥
Disclosure
Now, before we get into the nitty-gritty of aggressive tax strategies, a quick disclosure: I’m not a CPA. That means everything I’m going to explain here should be discussed with your accountant before you even think about trying these out. While some of these strategies are completely legit, others might attract some unwanted attention from the IRS, especially if they’re not executed properly.
Ok, let’s jump into the meaty part of this conversation.
Employing Your Spouse or Children
Legitimacy and Application
Let’s kick off with one of the most common strategies out there—employing your spouse or children. This one often gets tossed around as an easy way to lower taxes, and the truth is, it can be legitimate when done properly. Hiring your family members allows you to shift some of your income to them, often at lower tax rates or avoiding certain taxes altogether. Sounds great, right?
For instance, having your kids help out in the family business is legal, provided it’s legitimate work. You could have them shred documents, help with filing, or even manage that Instagram account no one’s had time to update. The key here is that the work has to be reasonable.
Pitfalls: Pay Your Kid a Fair Wage, Not 30 Grand
Here’s where people get into trouble—they overpay. Imagine little Suzie coming in one day a month to shred papers, and you cut her a check for $30,000. That’s an obvious red flag. We’ve seen people do crazy things like this, thinking it’s a legal tax loophole. Nope—pay has to be reasonable for the work done.
Historically, businesses hired their kids for print ads or company social media. Back in the day, when you needed professional-quality photos for advertising, paying your child to model for a campaign worked. But now that phones can take studio-quality pictures, that justification doesn’t hold up as well. So, keep the compensation in line with what they actually contribute.
Tax Benefits for Children
One more interesting benefit—if your child is under 18, you don’t need to withhold for Social Security or Medicare, giving you a decent tax break and shifting some income fairness. This could even be a fantastic way to help them fund a Roth IRA just by having them do legit work.
One caveat: the IRS typically scrutinizes jobs like this for kids under seven. If your toddler is “working” for you, expect a letter in the mail asking for more details. It’s not impossible to employ a child that young for things like modeling but be ready to defend your claims.
Documentation is Key
With this strategy, documentation is everything. If you’re hiring your spouse or child—make sure the work descriptions, hourly wages, and evidence for the job are clearly documented. Pay them fairly, as if they weren’t family. And at the end of the day, reasonable compensation is your best defense if any questions arise later.
The S-Corp Strategy: Play the Salary Game
Benefits and Common Abuse
Ah, the S-Corp strategy. This one is probably one of the most commonly used tax-saving tools and also one of the most abused. For those who aren’t familiar, here’s how it works: if you’re an S-Corporation (or you elect to be treated as one for tax purposes), you can take part of your income as a salary and the rest as draws. The draws? Well, they aren’t subject to FICA taxes—Social Security and Medicare—unlike your salary.
But here’s where things can go sideways. People think they can simply assign themselves a super low salary and take the rest as draws. While the IRS doesn’t spell out exactly what a “reasonable salary” is, there’s an unspoken understanding that if you’re, say, a brain surgeon, you probably aren’t justifying paying yourself $50,000 a year. You don’t have to be an IRS agent to see the obvious problem there.
Reasonable Salary
How do you know what a reasonable salary is? Unfortunately, it’s not something you can just Google. There’s no magic database where the IRS lists salaries by profession. This is one of those times when you need to sit down with your accountant and do some digging. Gather industry norms, take into account the responsibilities you’re managing, and document it all.
Examples of Abuse
We’ve seen a lot of high-income earners—doctors, lawyers, consultants—try to pass off ridiculously low salaries. It’s tempting because you want to minimize the amount you earn “officially” so you can maximize the chunk of income that’s considered draws, avoiding those pesky FICA taxes. But don’t do it. If you’re audited, you’ll be in for a rude awakening.
The Importance of Documentation
This leads us back to the golden rule: document, document, document. Keep notes on why you chose your salary, gather data on industry standards, and store it somewhere you can easily pull it out if (or when) the IRS comes knocking. You want proof that you’ve been diligent about staying above board.
Land Conservation Easements: The Cautionary Tale
Background and Popularity Pre-2022
Land conservation easements are probably the most aggressive of the strategies we’ll discuss today. They were incredibly popular before 2022, thanks to some creative math that allowed people to transform investment dollars into massive tax deductions.
Here’s how it would work. Say you plug a dollar into a land conservation easement. They tell you it’s worth more based on their appraisal methods—and you end up with a tax deduction that’s multiple times your initial investment.
At its peak, some easements were offering multipliers as high as 7 to 20! So, you’re investing $1 and may walk away with a $7, even $20 deduction. Sounds too good to be true, right? The IRS thought so, too.
IRS Limitations and Current Status
Fast forward to now, and the IRS has cracked down hard. As of 2022, they’ve capped the multiplier at 2.5. So now, if you invest that same dollar, you can only claim a tax deduction of $2.50. A far cry from the heyday of double and triple digits.
Accountants are no longer recommending these as aggressively as they once did, and many clients have dropped them altogether. Plus, even if you use them within the IRS’s rules, you’ll likely face a nasty audit down the line.
Documentation and Risks
Like any gray-area tax strategy, you’ll want your ducks in a row. Remain cautious and ensure any conservation easement decision is well-documented. Otherwise, you might face a big tax bill if your multiplier is deemed excessive. You bet the IRS has its eye on this.
The Section 179 Business Vehicle Deduction
Requirements and Use
Now, for a classic: the Section 179 business vehicle deduction—or as most people know it, the “6,000-pound rule.” Essentially, if you buy a vehicle that weighs over 6,000 pounds and is primarily used for business, you can deduct the cost in that tax year.
Perfect for families who are already planning to upgrade to a hefty SUV, right? But let’s back up a bit. While this deduction is entirely legitimate, don’t think you can buy this massive vehicle and claim it just because you drove a couple of miles for work.
Potential Pitfalls
To qualify, your vehicle needs to be used at least 50% for business. This is not a loophole you can sneak past the IRS with. I get it—everyone loves a good deduction, especially when getting a new vehicle. But you’ll want to make sure you truly meet that usage threshold before applying this deduction.
Also, timing your purchase near year-end won’t fool anyone into thinking it was entirely business-related, even if it feels strategic.
Documentation Is Essential
If there’s one thing you should take away from this guide, it’s the importance of documentation. Make sure you’re logging your mileage so you have rock-solid proof when someone asks for records of your vehicle use.
The Augusta Rule
Background of the Augusta Rule
Lastly, we’ve got the Augusta Rule, named after the Masters golf tournament in Augusta, Georgia. This gem allows you to rent your home to your business for up to 14 days a year and have that rental income tax-free.
It’s not a tax deduction, but the beauty is that money doesn’t get taxed when it comes back to you as rental income. A pretty sweet deal, right?
Application and Over-Inflating Risk
But here’s where people screw it up: they overinflate what they think their home should rent for. You can’t charge $100,000 for a week at your place unless it’s somewhere mind-blowing. The IRS expects you to base your rental fees on local comps—whether that’s nearby listings on Airbnb or hotel rates.
So, do your homework. Take a quick look at what your neighbors with similar homes are charging or local hotels for a comparable length of stay. This way, you stay within the IRS’s good graces.
Documentation and Practical Tips
Are you using part of your house for meetings but not the whole thing? Do the math if you’ve got unused rooms; factor that into your rate to be more conservative. At the very least, take screenshots or spreadsheets showing your research—trust me, your future self will thank you if you’re ever audited.
Conclusion
When it comes to sweetening your tax situation, there’s definitely some leeway—but you’ve got to play within the rules. From employing your family members to nailing down a reasonable salary in your S-Corp, the key is documentation and staying grounded within what’s reasonable.
These are all legitimate tax strategies, but as I’ve mentioned, you need a great accountant to guide you through them. It’s all too easy to push things a little too far, thinking you’ve found loopholes when, really, you’re setting yourself up for an IRS headache.
Again, it’s always a good idea to review your tax strategies with your accountant and, as always, keep impeccable records.
Looking for a more thorough all-in-one spot for your financial life? Check out our free eBook: A Doctor’s Prescription to Comprehensive Financial Wellness [Yes, it will ask for your email 😉]