Tax Planning Helps You Save $$$
All planning involves looking ahead to reach a
specific goal. People are inclined to make careful plans when
they consider making a home purchase, accepting a new job,
taking a dream vacation, or investing for retirement. But when
it comes to taxes, they often leave matters to chance, perhaps
not realizing the tax savings that can result. THE GOAL OF
YOUR TAX PLANNING IS TO SAVE YOURSELF MONEY!
One reason taxpayers may be hesitant to think about serious
tax planning is a misconception that it is somehow
unpatriotic. Yet even a well-known Tax Court judge made it
clear that the issue goes beyond patriotism. He stated... "...
there is nothing sinister in so arranging one's affairs as to
keep taxes as low as possible.... for nobody owes any public
duty to pay more than the law demands; taxes are enforced
extractions, not voluntary contributions." Every taxpayer has
the right AND the responsibility to lower his/her tax bill
using a number of different legal methods.
Tax planning is the tool that helps you evaluate your
financial situation in light of current law to make sure that
you get the benefit of all the deductions to which you are entitled.
When to Begin
To gain the most benefit from your tax
planning, you need to make it a consideration all year long.
However, many taxpayers find that Fall is the best planning
season. By then law changes and new tax rates are usually
known and there's still enough time to make adjustments before
year-end. You should strongly consider tax planning when you
know any of these items on your return are significantly more
or less than last year ... Income, Deductions, Income Tax,
Withholding, Estimated Tax Payments.
Most planning strategies
involve questioning WHEN to complete transactions that affect
taxes. EXAMPLE: Is NOW is the BEST time to buy a car for my
business or should I wait until next year?
Planning strategy is often built on two basic timing precepts:
Rule 1 Payment of tax owed on income transactions
should be postponed as long as possible (provided no penalty
postpone the payment of tax on a transaction (e.g., an
installment sale), it's almost like getting an interest-free
loan from the government. You have the use of the money
until the postponed tax must be paid.
sale transactions also can produce hidden dangers from tax
underpayment penalties. You will want to plan ahead
carefully when you have a sale to be sure that you are covered
as far as any penalty is concerned. Your tax advisor will
be able to suggest how best to do this.
Rule 2 Year-to-year tax bracket changes should be considered
when making decisions to pay deductible expenses or receive
Law change or fluctuations in your income and
expenses may shift you to different tax brackets from year to
year. As a general rule, it's best to receive income in years
your tax rates are low, and pay expenses when they are high.
Advantages of Tax Planning
By planning ahead, you can adjust withholding
and estimated tax payments to help eliminate or reduce tax
penalties. Making adjustments may also help you postpone
payment of tax (you'll be taking advantage of Rule 1) or let
you shift some income or deductions to different tax years to
at least lower your taxes (in other words, you'll be making
use of Rule 2 above).
If you have a casualty loss (e.g., a loss due to fire, theft,
or natural disaster), shifting income from one year to another
may allow you a greater loss deduction. In some cases you can
even choose in which year to claim the loss. Tax planning
helps you evaluate whether a deduction will really benefit
you. Many taxpayers like to make their last state estimated
tax payment in December so they get a federal deduction for it
in the current year. This strategy often is a good one; but
under certain circumstances, you gain nothing taxwise.
Planning can help you tell for sure!
Buying and selling property create all kinds of tax planning
opportunities. For example, if you expect to sell real
property at a gain in the near future, your planning should
question the timing of the sale closing AND whether it's best
to report your gain all at once or over several tax years
(i.e., an installment sale). Another tax break available for
property dispositions is the so-called tax-deferred exchange.
If you intend to buy another property similar to the one you
sold, your plans should consider how an exchange could work
Retirement decisions can cost a lot in extra
tax dollars if you don't take the time to develop a sound tax
plan. BEGIN THE PLANNING WELL BEFORE
YOU'RE SCHEDULED TO RETIRE TO MAKE SURE YOU COVER ALL THE
OPTIONS. For example, say you're an
employee and your employer offers you a choice between getting
your pension as an annuity or as a lump-sum payout. Your
planning needs to include crunching numbers to determine the
best way to go. You might be eligible for certain special
averaging calculations which apply to pensions and can save a
lot on taxes! Or perhaps a rollover to an IRA needs to come
into the picture. Planning will help you find the best answer!
The tax law provides special breaks for home sale gains and
planning can help make sure you qualify for them. Homeowners
may exclude all (or a part) of a gain on a home if they meet
certain occupancy and holding period requirements. Be sure to
check before finalizing a sale to make sure you meet
qualifications. Borrowing funds creates interesting tax
The interest on many loans is deductible. Right? NOT ALWAYS!
So ensure you are able to deduct the interest, do your
planning homework before you sign on the dotted line! Tax
planning is a must when there are property settlements due to
divorce situations. Because of the manner in which the tax law
handles transfers of property between spouses, what appears to
be a fair split on the surface can turn into just the opposite
in the long-run.
When it's time to purchase business equipment, plan first. The
tax law contains complicated rules about computing
depreciation on business property purchased in the last
quarter of the year. Timing of your purchases could be vital
to ensure that you get the most from your expenditures.
Your Tax Planning Barometer
Consider tax planning BEFORE you make a
decision about any of the following: 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 vacation home, Rental property, Any other
real estate Stocks and bonds, Partnership, interest, Vehicles
(autos, motor homes, airplanes, etc.), Your personal
residence, A business or business assets, Tax shelter,
Retiring, Getting married, Negotiating a divorce agreement,
Making investments where your participation will be minimal,
Making a large gift to your child or other relative, Changing
the form of your business to a partnership or corporation,
Incurring business expenses as an employee, Holding an
uncollectible note and Moving.
The purpose of this
information is to provide current information on tax,
financial and business developments. It suggests general tax
planning ideas that may be appropriate in certain situations.
The information and opinions are generalizations and may not
apply to all taxpayers; it is important that you seek
appropriate advice before implementing any of the ideas