“The tax dollar you save today can be worth many times that amount decades from now.” - Harry S. Dent, Jr.

The sweeping economic changes we have seen especially over the last decade have not had an equal impact on all income groups. The rich are getting richer at an accelerated rate. If you are among them, or if you are serious about becoming affluent, tax planning is critical.

It is a common assumption that the wealthy escape the tax burden that the middle class bears, but this simply isn’t true. In 1998 the top 1% of income earners, households that earned in excess of $229,230, paid 32% of the federal individual income tax. The top 5%, households with incomes greater than $101,202 paid 51%.

The chart below illustrates one clearly documented fact: Despite the extreme changes in tax policies, the amount of money the federal government has collected as a percentage of GDP has remained fairly constant over six decades. The conclusion? As tax rates fall, the wealthy are more willing to pay their fair share. As they rise, they seek and find effective tax shelters.

Click chart for larger view

There are 9,471 pages in the Internal Revenue Code versus 1,291 pages in the Bible. Individuals spend a lifetime becoming expert in each one—and nobody is revising the Bible.

Many people imagine that they can handle their taxes as easily as they can manage their investment portfolios. HS Dent doesn’t recommend doing either one without professional advice . First, tax planning is not the same thing as doing your taxes. It requires a broad view of your finances over the long-term, as much as 3 or 4 decades depending on your current age. Second, tax policy continues to grow more complex despite proposals to simplify it, precisely because they tend to favor the wealthy and aren’t likely to get broad voter approval. Third, tax law is continually changing and only an expert can guide you through the maze and find legitimate ways to reduce your tax burden. Fourth, a look to the near future presents an obvious additional concern. When the economy turns from boom to bust after 2009, we should anticipate marginal tax rates on the affluent to rise sharply, just as they did starting in the 1930s. The time to start protecting yourself is now!

But even these considerations don’t tell you the single most important reason to pay attention to tax planning. It’s not what you save today in taxes that matter. It’s what that tax savings will be worth to you years from now as you compound the returns.

For instance, suppose we assume a 12% annual return on investment, which in this booming economy is a very conservative rate of return. If you were to save one dollar in taxes today, it would be worth two dollars in 6 years, four dollars in 12 years, eight dollars in 18 years, sixteen dollars in 24 years, and thirty-two dollars in 30 years. Now imagine what the compounded rate of return would be like on a thousand dollars, or even $10,000. The advantage of tax planning now is what that money will be worth to you, if you invest it systematically, 12, 18, 24 or 30 years from now.

There are many facets to tax planning. The first and most important step is to defer your income through the variety of savings and investment vehicles available today so that you can more effectively build your wealth throughout “the Roaring 2000s.” A good financial advisor can tell you your options, which include:

• Investing in Variable Annuities and Variable Universal Life Insurance
• Estate Planning
• Setting up a Charitable Foundation