A very important part of reducing taxes is tax planning. This article will help by providing a financial planning perspective for your overall tax situation.

1. Be aware of the different types of taxes

Many people are not aware of the different types of tax systems that we have, such as:

  • Income: Federal, State and Local. Real estate tax.
  • Tax on Investments:  Dividends, interest, capital gain, and passive income on stocks, bonds, mutual funds, and investment real estate.
  • Estate or Inheritance Tax: Federal and state tax due on the estate or the inheritor.
  • Gift tax: tax on larger gifts.
  • Entitlement Tax:   Social Security and Medicare (FICA), Federal Unemployment (FUTA). Sales, self employment, state unemployment (SUTA), state disability (SDI), and corporate taxation.

2. Consider working with a qualified tax professional

Tax planning can be complex for many people, therefore it may be wise to work 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:

  • Personable:  Someone that you can interact with and who cares about you AND who will offer suggestions and tips on business matters that you might not be aware of.
  • 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 for referrals.
  • Skilled:  Look for an accountant that is very competent. You have to be smart to obtain a degree in accounting or law.
  • 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. 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.

3. 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.

4. Doing Your Taxes Yourself?

I firmly believe in getting professional tax assistance. The professional could find tax deductions and income reduction strategies you aren’t aware of.

I realize that many people prefer to do their own taxes, perhaps thinking to save money, or perhaps having to clean up the mess a low cost preparer made, and vowing to do their own.

Yet, often, the professional tax preparer’s fee will be offset by the tax savings.  And the peace of mind that the taxes are done right has a value all its own.

People who have prepared their own taxes with paper and pencil or software usually understand taxes better. However, If you self-prepare your taxes, consider having a qualified accountant review them before you send them in. They may find things you or the software might have missed.

You can usually file your taxes electronically for free through the IRS website at www.irs.gov/efile/.  Some States allow you to ‘phone in’ your State return for free.

If you use tax software and wish to e-file be aware of the fees so that you can budget and compare prices properly.

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 will be worth every penny should the IRS contest the receipt of your return.

5. 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 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
Taxes

Now file your receipts into these sections. Organizing your receipts will help you “Take the mystery out of…” your financial situation. 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 should 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.

6. Start early

Do not procrastinate on your taxes. Tax professionals are unbelievably busy January through April. Firms who prepare business returns also have a 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 an October or November meeting with your accountant in preparation for year-end. 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.

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.

If you are looking for a professional, find one now!

7. Prudent 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.

8. Tax planning can save you hundreds, if not thousands, of dollars

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.

Don’t delay.  Start today!  After all…”It makes more sense to look ahead and prepare than to look back and regret!”

I hope you enjoyed this article. Please do not hesitate to contact me Click Here! if you have any questions, or if I can be of assistance to you.

If you have a business, be sure to sign up for my “Keep It Simple” Tips & Tricks and www.victorialenhardt.com

Warmest Regards,

Victoria L. Lenhardt
Bottom Line Enterprises