There Are Two Tax Systems in America. Both Are Legal.
There Are Two Tax Systems in America. Both Are Legal.
A federal judge said it better than I could: “There are two tax systems — one for the informed and one for the uninformed. Both are legal.”
Judge Learned Hand made the same point even more plainly in his dissent in Commissioner v. Newman, 159 F.2d 848 (2d Cir. 1947): “Anyone may arrange his affairs so that his taxes shall be as low as possible… there is not even a patriotic duty to increase one’s taxes.”
Read the full opinion on Justia →
The Thread Running Through Everything
That’s the idea connecting everything shared these past few weeks — sequence of returns risk, tax-free income structures, Social Security taxation. None of it is aggressive planning. All of it is simply using what’s already legally available, correctly.
Nothing about either system requires a loophole, a gray area, or anything remotely aggressive. Both operate entirely inside the same published tax code. The only difference is whether someone happens to know the rules exist — and structures their plan around them — before the decisions get made, not after.
Three Examples, Already Covered
Sequence of returns risk. A 50% decline doesn’t need a 50% gain to recover from — it needs 100%. Structuring a portion of retirement savings to limit the downside changes what a bad market year actually costs, entirely apart from any prediction about when that year arrives. (Why a 50% Loss Needs a 100% Gain to Break Even)
Tax-free income structures. Two identical starting balances can end in opposite places depending entirely on how the withdrawals are taxed — not on investment performance at all. (Two Identical $1,000,000 Accounts. One Runs Out. One Doesn’t.)
Social Security taxation. Up to 85% of a benefit can be federally taxable — a formula almost nobody hears about until after they’ve already filed. (The Number Worth Knowing Before You File for Social Security, Not After)
One More Worth Naming
A Roth conversion analysis is a good example of this same idea in action: done at the right time, it can meaningfully reduce lifetime tax paid — sometimes by a wide margin. I’ll be writing about this specific strategy soon, in the detail it deserves.
Which System Is Your Plan In?
If it’s been a while since anyone walked you through which system your own plan is actually in, I’m glad to have that conversation.