Tax Planning for Every Taxpayer
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 tax return.
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.
Eleven 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
Mistake #2. Making a financial decision without
conducting alternative tax obligation scenarios. Buying
and selling a home, business, or investment are common
Mistake #3. Under or over withholding State and
Federal income taxes.
Mistake #4. Not taking full advantage of tax free and
tax deferred programs (i.e. retirement and education savings
#5. Not reviewing and adjusting your W-4 (withholdings)
after a life change (i.e. marriage, divorce).
#6. Not keeping adequate records of deductible
#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
#10. Failing to take into account changing tax brackets
and the AMT (alternative minimum tax) amounts. This is
important with the lower tax rates available for certain
capital gains and corporate dividends.
#11. Failing to take advantage of tax credits and all
Tax Planning 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:
money or refinance
to pay off a loan
planning for retirement
You buy or
sell stock and mutual funds
adding to or withdrawing from a tax deferred savings program
(IRA, 401(k), etc.)
getting married or divorced
You buy or
sell your home
You want to
make a large gift to a child or relative
considering starting, buying or selling a business
incurring business expenses as an employee
buying or selling business equipment
holding an uncollectible note
considering a large charitable gift
buying or selling any kind of property
You incur or
expect to incur large medical expenses
employer offers you a lump sum payment of your pension versus
You incur or
expect to incur large education expenses
You are the
beneficiary of an estate
Tax Reduction Avoidance Ideas
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
1. When is
the best time to complete a transaction that impacts your tax
2. How do
you reduce your overall tax burden? What options are
3. Defer any
tax obligation, penalty free for as long as possible.
high income with high deductible expenses whenever possible.
your marginal tax bracket when making decisions. The
next dollar you earn could be taxed from 10% to 35%.
common tax planning and tax avoidance ideas are:
in tax deferred IRAs, Keoghs, SEPs and 401(k) programs.
the IRA programs such as the Roth IRA and the Coverdell
expand funding for spousal IRAs.
advantage of the interest deductibility of your home mortgage
and home equity loans versus credit card debt or other loans.
Annuities for their tax benefits.
using tax deferred cast value life insurance.
If you have
a casualty loss, shift income to the same year to maximize the
available write off.
municipal bonds and bond funds.
If you own a
home, consider making an additional payment to shift interest
expense into a high income tax year.
you have a QDRO (Qualified Domestic Relations Order) that is
negotiated as part of a divorce decree to address the tax
implications of the asset allocation.
planning for retirement early. Conduct income forecasts
and continually rebalance your estate to reduce taxes.
advantage of the Section 179 expense option for depreciable
assets of your business.
to take advantage of post secondary education tax credits and
tax favored savings plans.
gifts to minors and beneficiaries over time to reduce
investment income and future estate taxes.
business use of your home to capture business expense
capital acquisitions and sales to offset gains with losses and
to capitalize on lower long-term capital gains tax rates.
moving interest bearing investments to dividend bearing given
lower tax rates.
like-kind exchanges to reduce capital gains tax exposure. If
you intend to buy replacement property you can effectively
defer a tax table gain into the future with a like-kind
advantage of the $250,000 ($500,000 married) capital gain
exclusion for the sale of your personal residence. The
new exclusion can be used once every two years for your
neglect estate planning strategies for you, your spouse,
children and your parents, if needed.
A Word on
Tax Free Yields
When it is 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, use the following formula:
Tax-free yield / 1 minus your federal tax bracket =
Assume you are in the 25% marginal tax bracket and want to buy
tax free municipal bonds with a 6% yield. The equivalent
yield you would need in a taxable savings account or taxable
investment would be 8.0% (.06/(1-.25) = 8.0%).
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 something like this:
1. Initial Interview/Review
2. Conduct a next year tax
forecast based upon established objectives
- Business expenses
- Retirement (IRAs,
- Tax reduction ideas
- Estimated payments
- Long-term tax plan
4. File prior year tax
Feb. - April
5. Conduct a mid-year
- Assess withholdings
- Estimate year end
- File quarterly
- Update the long term
6. Review of any new tax
law changes and situational changes as required
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