Wrong Way to Cut Client Taxes | Financial Planning by Michael Kitces

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socialsecurity

No one likes to pay any more in taxes than they have to, so it’s not surprising that advisors use the many strategies legally available to try to reduce the tax burden of clients.

However, in the case of FICA taxes, strategies that reduce earned income to avoid them also reduce the income used to calculate an individual’s Average Indexed Monthly Earnings (often referred to as AIME) — which in turn is used to determine future Social Security benefits.

As a result, strategies that seek to minimize your clients’ payroll and/or self-employment taxes can also, ultimately, reduce their Social Security income. And while the forgone benefits may be quite modest for higher-income individuals, the adverse impact can be quite substantial for those with limited lifetime earnings.

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