Tax Planning is a Year-Round ProcessSubmitted by Guidant Planning on May 7th, 2008
by: Allen G. Yee
You’re done with taxes for a while, right?
Many people confuse tax-planning with tax preparation. However, nothing can be further from the truth. Tax preparation is merely reporting what happened in the previous year and there is little, if anything you can do to lower your tax bill when you’re preparing your return. If your goal is to lower your taxes, you need to seek opportunities throughout the year.
My recommendation is to take time during the preparation phase of your return to access your current tax situation and make goals to seek opportunities to reduce your income tax bill. Consider items that can increase your deductions (Schedule A), what type of debt you’re using and most importantly, what investments are in your portfolio. An additional method to lower other taxes, like estate taxes, is to include gifting programs for children and other loved ones and stretch IRAs. Also, charitable contributions strategies, tax deductible investments and expenses should be considered.
During the year you should consider tax consequences prior to making important financial decisions. As I have told many clients, I would rather hear, “This is what I’m contemplating,” versus, “This is what I have done.” Once you’ve acted on something, it’s too late and there’s no reason to ask for anyone’s opinion. Do your homework first. Always consult with a professional before selling any real estate or investments from your portfolio. This will prevent you from finding out later that there was a better way to handle the transaction for tax purposes. While tax considerations should not be the sole factor when making financial decisions, you may discover alternatives ways to handle the transaction.
Your tax situation should be reviewed a couple times a year, preferably in the spring and fall. This gives you ample time before the end of the year to implement additional tax planning strategies. At that time, you’ll have three-fourths of the year to see your situation. You could then consider strategies that you didn’t use previously, such as: selling investments to offset loss or gains; contributing to qualified plans or using Roth IRAs; prepaying expenses to accelerate tax deductions; or deferring income until the following year. If your goal is to lower your taxes, start planning now.