Tax Planning Advice

Tax planning tips for every taxpayer

      The concept of Tax Planning is often an overlooked means of saving hard earned income. The laws are complex, the fear of an audit looms in the distance, and tax implications are not top of mind until it is time to file a return.

      Remember that the Government only requires you to pay the proper amount of income taxes and NOT A DIME MORE. This     concept has held true in many tax court cases where judges have noted it is not wrong to take steps to reduce one’s tax obligation within the limits of the tax code.

        COMMON MISTAKES

1. The biggest mistake made is waiting until too late in the year to assess your tax obligation. Often it’s too late to take action or cash is not available to handle the obligation.

2.  Making a financial decision without conducting alternative tax obligation scenarios. Buying and selling a home, business, or investment are common examples.

3. Under or over withholding State and Federal income taxes.

4. Not taking full advantage of tax free and tax deferred programs (i.e. retirement and education savings plans).

5. Not reviewing and adjusting your W-4 (withholdings) after a life change (i.e. marriage, divorce).

6. Not keeping adequate records of deductible expenses.

7. Not protecting your assets from the final tax bite should you pass away (Estate Planning).

8. Overlooking charitable donations.

9. Using non-deductible consumer debt (credit cards and auto loans) instead of deductible, Home Equity debt instruments.

10. Failing to take into account changing tax brackets and the AMT (alternative minimum tax) amounts. This is important with the lower tax brackets available for certain capital gains and corporate dividends.

11. Failing to take advantage of tax credits and all allowable deductions.

TAX CHECKLIST

There are a number of events that should trigger a review of your tax situation. The following is a list of the most common. Seek advice and run alternative tax scenarios prior to deciding the best approach for your situation when:

TAX REDUCTION / AVOIDANCE TIPS

To benefit the most from tax planning and avoid the common mistakes mentioned earlier, develop a tax strategy for your situation. The strategy should incorporate the following planning principles:

1. When is the best time to complete a transaction that impacts your tax situation?
2. How do you reduce your overall tax burden? What options are available?
3. Defer any tax obligation, penalty free for as long as possible.
4. Match high income with high deductible expenses whenever possible.
5. Consider your marginal tax bracket when making decisions. The next dollar you earn could be taxed from 10% to over 35%.

Some common tax planning and tax avoidance ideas are: (Remember, AVOIDANCE is legal, EVASION is NOT)!

A WORD ON TAX FREE YIELDS

When is it better to invest in a lower yield tax free investment versus a traditional taxable investment? It depends upon your financial plan, investment risk profile and balanced portfolio need. Those elements aside, to aid you in comparing the investments, simply use the following formula:

Tax-free yield / 1 minus your federal tax bracket = taxable yield.

      Example: Assume you are in the 25% marginal tax bracket and want to buy tax free municipal bonds with a  6% yield.

   The after-tax equivalent yield you would need in a taxable savings account or taxable investment would be 8.0% (.06/(1-.25) = 8.0%).

THE TAX PLANNING PROCESS

   A typical Tax Planning Cycle runs for one year.

 The best time for review is usually after the new tax laws have been introduced.  

This is typically in the September/October time frame. The steps in the planning process may go as follows:

Take a proactive role in your tax planning!

Call Accounting Connections, LLC

770-846-7799