As we start looking toward the end of the year, tax planning strategies for 2017 and 2018 become our primary focus. But what is tax planning and how do tax planning strategies save money and avoid surprises?
Every taxpayer has the right and responsibility to lower his/her tax bill using a number of different legal tax planning strategies. Tax planning is the tool that helps you evaluate your financial and tax situation in light of current tax laws to make sure:
- You get the benefit of all the deductions you’re entitled to.
- You take the deductions at the right time to maximize tax savings
- You employ other tax planning strategies to minimize your tax bill
Ideally, tax planning happens throughout the year. That could happen at a variety of times: when you decide on participating in your employer’s retirement plan, when you buy or sell investments, or have a life-changing event. Here are some examples of when tax planning becomes important:
- Borrowing money for any purpose
- Paying off a loan
- Contributing to or taking funds from any type of retirement plan
- Buying or selling any kind of property (a primary residence, vacation home, rental property, other real estate, stocks and bonds, partnership interests, vehicles in your business, a business or business assets, tax shelter, etc.)
- Retiring
- Getting married
- Negotiating a divorce agreement
- Making investments where your participation will be minimal
- Making a large gift to your child or another relative
- Changing the form of your business to a partnership or corporation
- Incurring business expenses as an employee
- Holding an noncollectible note
- Moving
If you’ve experienced changes in income, a change in financial situations, or just want to know where things stand and see if you can reduce your tax burden, the Fall is an excellent time for tax planning. But what does tax planning mean?
We view tax planning as a two-part process. First, we will prepare a tax projection. A tax projection looks at your current income and deductions to determine how much your taxes will be when the return is filed next year, and how much of a refund you might receive or how much you may owe. Once we know that number, you will have an idea as to what the tax return should look like assuming you don’t employ any tax saving strategies. The second part is the planning phase. Based on our knowledge of your situation, we can discuss tax planning strategies to reduce your tax bill. It’s important to do this part as early in the year as possible so you have enough time to actually make things happen. Almost all strategies should be either planned or completed before 12/31 of the current year. Some things, like setting up a retirement plan for your business, must happen much earlier. As a result, the earlier you start the process, the more time you have to accomplish real tax savings.
If we have not prepared your 2016 tax return, we will need a copy of the last two years’ of returns. We will ask a series of questions and ask for information related to the current year: pay stubs, estimated financial statements for your business, changes to income and deductions as compared to the prior year, etc. We will also ask if anything new is expected between now and the end of the year. Lastly, we will ask you to give us an idea as to what next year looks like compared to this year. For example:
- If you are a business owner, do you expect growth or decline
- Will you be retiring?
- Are you changing jobs?
- Are you getting married? Or divorced?
- What else is changing that could have an effect on your financial situation?
Once we have this, we will get to work on the projection and give you some ideas for tax reduction. We’ll go over our findings in written form and also be available either in person or by email/phone to review these suggestions with you.
By acting as early in the year as possible and no later than early December, we can help guide you through tax planning strategies to save you taxes this year and for years to come.
