The misconception with tax strategies

Every week I take a call with a startup employee or founder who is looking for “creative ways to minimize tax”. There are of course, many ways to plan around your taxes and ultimately come out ahead, but these individuals specifically are almost always looking for a silver bullet solution.

In order words, they are looking for a simple win-win solution that will help shield them from taxes. They want to stay in California and not pay California taxes. Or they want to take advantage of the ISO tax benefits without exercising. That unfortunately does not exist. Nearly every legal tax strategy comes with a “but”.

Some simplified examples:

• Eduardo Saverin (one of the Facebook founders) was likely able to avoid paying US taxes on the Facebook IPO. He just had to renounce his US citizenship and no longer can come back to the US.

• You can use various trust structures to avoid gift and estate tax in the future, but each trust has strict requirements such as you gift the shares completely to charity in the future or the shares are permanently in the beneficiary’s name. You may avoid taxes on the transfer of shares in the future, but you’re quite literally giving them away.

• You can take advantage of tax breaks on stock options if you exercise earlier. You may even qualify for QSBS which is the biggest tax break for early stage founders and employees. However, it requires that you buy the shares today and risk that cash if your company does not make it.

Of course, things are a bit more complicated than the above. This was meant to be a simple view to prove my point that there’s no perfect and easy tax strategy. There is a cost to all proactive tax plans… quite often that cost is worth taking.

But for those that are looking for an easy answer to avoid paying taxes as an American citizen, you may need to lower your expectations.