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5 Reasons You Should Prioritize Tax Planning


Most people either don’t do any advanced planning or they wait until the last minute to try and do something about reducing their taxes. Advanced tax planning is the process of projecting your tax liability ahead of time, and reviewing your situation to uncover strategies that can reduce your current or future tax liability.

By planning ahead and being proactive, you open a plethora of options to reduce your taxes. These options are not available to you when the time comes to actually file your tax returns. So here are the 5 Reasons You Should Prioritize Tax Planning.

1. To Pay Less Tax, of Course!

Okay… the most important reason you should prioritize tax planning is pretty obvious – so you can pay less overall tax!
Reducing your tax in the current year or in future years can be accomplished easily with some planning. Most people benefit from tax planning, but it is especially important if any of these situations apply to you:

  • You are self-employed or a business owner.
  • You have investments with significant unrealized gains or losses.
  • You have had a major life-changing event during the year, like selling a home, marriage or divorce, if you’ve retired or had a child.
  • If you’ve had a dramatic change in your income (up or down), or a change in jobs.
  • If you have moved, especially between states.
  • If you are sending a child to college for the first time.
  • If you purchase health insurance from the government health exchange (i.e. Covered California for California Residents)

Let me illustrate with a real-world tax planning example:

A client of mine owns a consulting business and has a widely varying income. She typically generates income between $200,000 and $300,000 per year but this year we have reviewed her current and projected income and estimated that her net consulting income will be $50,000. That change in income creates some great tax planning options for her!

She has an investment account in which she owns stock that she trades infrequently. Many of her stock holdings have appreciated over the years and are now worth significantly more than when they were purchased.

Because she is married, has children and has fairly high deductions such as mortgage interest, taxes, and charitable contributions, she has the opportunity to sell some of her stock without paying any federal tax on the resulting capital gains due to the 0% capital gains rate currently in effect at certain tax brackets. We recommend that she sells stock to recognize capital gains this year of $48,000, which will result in exactly $0 federal tax. Had she made this same sale in one of her high-income years the federal tax would have likely been $9,600 or higher. She can prevent this from ever happening by selling and repurchasing the investment before the end of the year.

2. To Allow Enough Time to Implement Planning Ideas and Maximize their Benefits

While some tax planning strategies can be accomplished in short order at the last minute, most require much more time for proper analysis and implementation. Legally shifting income between individuals or companies takes months (or longer) and the most tax advantageous company retirement plans take at least a month to implement and must be in place before December 31st.
We begin tax planning for our more complex clients in late October or early November. If you run a business or have a more complicated tax scenario, we recommend that you start planning early enough to have the plan completed and in motion before the start of the holiday season. Start extra early if you are planning on implementing a 401(k) plan or another retirement plan that requires deferred wages.

3. To Take Advantage of Annual Tax Law Changes

Every year, or at least nearly every year, the federal government changes the tax laws. Sometimes the changes are minor, like the amount of funds you can contribute to a retirement plan, and sometimes the changes are major, like being able to deduct up to $1,000,000 in equipment purchases rather than $25,000. No matter the number or type of the law changes, the result is that what’s true on December 31st of one year may not be true the next day.

The law changes make tax planning important so you are able to take advantage of the changes. Maybe you need to take action before a particular law expires. Or maybe you need to delay something until next year to benefit from a new law taking effect.

Being proactive gives you the ability to benefit from the changing environment. Ignoring the upcoming law changes may leave you saying, “If only I had called my tax consultant in November I could have saved hundreds or thousands of dollars, had I known then what I know now.”

In recent years, Congress has often added extra challenges by waiting until the very last minute to implement tax law changes. The more informed you are on expiring tax laws and potential new laws the more equipped you’ll be for tax planning.

4. Due to the Merger of Tax and Healthcare

The implementation of the Affordable Care Act (Obamacare) merged the worlds of health insurance and taxes into one realm. For better or worse, it created a landscape where changes in one may have drastic effects on the other. Especially for those individuals who purchase insurance via the health exchange (i.e. Covered California for California residents). You can find additional information from the IRS by clicking here, “Affordable Care Act Legal Guidance and Other Resources”.

If you buy insurance from the health exchange then your premiums are tied to your income, which heightens the importance of tax planning for you. We’ve seen cases where a change in income of $5,000 has a change in tax liability of $10,000 because of the way premium repayments are calculated for people with income that exceed 400% of the federal poverty limit. Hard to believe, but we’ve had cases where we recommend that a client contribute $5,000 to an IRA in order to save $10,000 in taxes.

As long as the link between income taxes and health insurance exists, pay close attention to tax planning.

5. There is a Firm Deadline!

Nearly all tax planning ideas become useless when the ball drops on New Year’s Eve. No matter how many great ideas you or your planning professional has, most action items are required to be done before the end of the year.

Contact us to schedule a tax planning consultation now.

Written by Jeff Johnson

Jeff Johnson has been helping individual and small business clients with tax and financial planning for over 15 years. Starting with a degree in finance from the University of North Dakota, Jeff has continually increased his financial education. He currently holds the industry designations of Enrolled Agent (EA) and Certified Financial Planner (CFP®). In addition, he holds a life and health insurance license from the state of California. Jeff is a member of the California Society of Enrolled agents and the Financial Planning Association.

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