How Can Tax Planning Strategies Save You Money and Avoid Surprises

As we start looking toward the end of 2020, tax planning strategies for 2020 and 2021 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:

  • Receive the benefit of all the deductions you’re entitled to.
  • Take tax saving deductions at the right time to maximize tax savings
  • Use 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:

  • If you own a business and expect a significant change to income
  • 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 uncollectible 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 or expected 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. Many clients stop at this step and some will continue to the meat and potatoes of the process: Tax Planning.

Once we get a feel for your expected income levels for this and next year, we can move on to tax planning.  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. Typically this starts in early October and gives you 2-3 months to consider and take action on alternatives. Almost all strategies need to 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 did not prepare your 2019 tax return, we will need a copy of the last two years’ of returns. In addition to that, we will ask a series of questions and ask for information related to the current year: pay stubs, projected 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. Contact us soon to get started.