A very important part of personal financial planning is tax planning. As you prepare for tax season, here some general things to consider:
- Be aware of the different types of taxes: Many people are not aware of the different types of tax systems that we have. The following are the most common systems that may affect you. Income: Federal, State and Local. Real estate tax. Tax on Investments: Dividends, interest, capital gain, and passive income on savings, stocks, bonds, mutual funds, investment real estate. Estate or Inheritance Tax: Federal and state tax due on the estate or the inheritor. Gift tax: tax on giver of large gifts. Entitlement Tax: Social Security and Medicare (FICA), Federal Unemployment (FUTA). Self Employment and Business taxation. Sales tax.
- Consider working with a Qualified Tax Professional. Tax planning can be complex for many people. This is due to the complexity of our many tax systems and your personal and business circumstances. I highly recommend working with a trusted professional tax advisor. Tax advisors not only prepare your taxes but can help make decisions that will affect your future. They can serve as advisors for a whole host of matters and they can represent you if you face the dreaded audit. Consider the following when selecting a tax professional: Local: Someone that you can easily meet with face to face. Personable: Someone that you can interact with and who cares about you. Proactive: Some tax preparers simply look at your previous year’s return and plug your current numbers into last year’s format. This of course assumes that last year’s preparer knew what he/she was doing. Try to find a preparer who knows your situation. A proactive professional will ask questions that will help you anticipate changes in your tax situation to help you properly plan in advance. Reputable: Find a professional with a good reputation. Ask people you admire for a referral. Skilled: Look for an accountant that is very competent. A degree in accounting or law is very difficult to obtain. Designations such as CPA (certified public accountant), EA (enrolled agent) and LLM (master’s degree in tax law) are not prerequisites but may be helpful. Fees: Find out up front what they estimate their fees to be, what they charge to file electronically and whether they will represent you in an IRS audit. Avoid any ‘early refund’ ploys like the plague. Some well-known tax preparation companies ‘provide’ this service which charges a hefty fee (with a lot of small print) and a lot of advertised hype for you to get your refund ‘early’. It is basically a high-interest loan. Just waiting for your actual refund will save you a lot of money.
- Remember, tax preparation entails both art and science. The science involves the mathematical calculations that in most instances can be figured using calculators and software, and the infinite number of complex tax laws. The art of tax planning comes into play with interpretation of any special circumstances. There are some areas of tax law that leave the government’s intentions unclear. No law can completely anticipate each person’s situation. You could call a dozen different IRS agents with the same question and get as many different answers. A proactive planner will research any unusual circumstances you may have and help you plan a course of action.
- Doing Your Taxes Yourself? I firmly believe in getting professional tax assistance. However, I realize that many people prefer and insist to do their own taxes perhaps to save money. It has been my experience that often the professional tax preparer has saved us the amount of their fee in our taxes. The peace of mind that the taxes are done right has a value all its own. If you made less than $57,000 you can file your taxes electronically for free through the irs.gov website. If you choose to mail your return, go to your local post office and send it ‘Certified Return Receipt’ mail to insure that you have a record that the IRS received your paperwork. This will cost around $10 or less and will be worth every penny should the IRS contest the receipt of your return.
- Keep great records. If you are already very organized you may read this section just to feel great about your organization skills or skip to the next section. If, however you have heard ‘get organized’ many times before and if you are the type of person who balks at the idea of organizing that mess of receipts just remember how you felt last year as tax time approached. You could become organized in only one evening of television viewing with the right tools. Arm yourself with an accordion file with at least 16 sections. Label them according to your situation or use the following sections: Auto, Bank, Business, Credit Cards, Dental, Medical, General Receipts, Grocery, Income, Insurance, Mortgage, Utilities, School, and Taxes. Now sort your receipts into these sections. Use a new accordion file every year. Not only will this help you find needed information, it will also help you find a receipt in case you need to return an item you purchased. Your tax professional will be sending you a tax organizer the end of December or the first of January. In this organizer will be a list of information that you will need to gather. Becoming organized will help you easily gather the information you need to fill out your tax organizer.
- Start early. Do not procrastinate on your taxes. Tax professionals are unbelievably busy the closer April 15th is. Firms who prepare business returns also have a crazy March 15 business deadline. We are providing this information because we want you to get the most attention from your preparer during their craziest season. As soon as you get your organizer, begin gathering the needed papers. If you are only missing one or two pieces of information return the organizer to your accountant with a note that says what is missing. They will begin entering the information in their software. Try to get a January or February meeting with your accountant. These months are the best to meet because they will have more time to spend with you and they will be able to think proactively. If you are looking for a professional, start looking now. Another reason to start early is allowing yourself time to look for records, ask financial institutions for copies of lost information, or calling investment companies for statements.
- Judicious Paycheck Tax Withholding. Many people like to overpay their taxes, so that they get a nice refund in time for vacations or other wants and needs – Kind of like a forced savings. Overpaying taxes is like a giving the government an interest free loan of your money. Good financial management involves developing savings habits so that you set aside money in an interest bearing account from each paycheck for future needs, wants and emergencies. This helps you to avoid using credit cards for those things and not having to wait until refund time. Secondly it then allows you to manage how much you can afford or are able to put into 401(k) plans at work. This accomplishes two things, first you are managing your money better and you are saving for retirement. Saving for retirement in tax-deductible retirement plans like 401(k)s will also lower your taxes, enabling you to save more for retirement and everyday needs and wants. If you want to lower the taxes that are being withheld from your paycheck, file a new W-4 form with your employer to claim an additional withholding. Make adjustment for getting married, divorced, having children and for increasing contributions to tax-deductible retirement plans. Your accountant will help you estimate this.
- Tax planning is not the tail that wags the dog. Taxes consume a large if not the largest single percentage of your income, therefore good financial planning should strive to lessen them, by whatever means possible as allowed by law. However, tax planning is not the only core issue of good financial planning. Tax planning works in concert with your overall goals and your individual situation.
