In 1993 Willie Nelson created an album called “The IRS Tapes: Who Will Buy My Memories” which was a creative accommodation the IRS allowed for him to pay back his $16.7 million tax bill. The trouble began when the IRS had deemed the tax shelters his accountants had set up to be invalid. He used all the proceeds made from this album to pay back the money he owed. Now this may sound funny to the normal taxpayer; however, knowing what options are available to you is crucial to gaining the financial health that the everyday taxpayer is looking for. Tax planning is for everyone and becoming tax smart and financially literate may stop you from having to drop an album to pay back the IRS.
What is Tax Planning?
The act of tax planning is not only beneficial to you, but necessary if you wish to have a fulfilling financial year. Now, you may be asking yourself “what is tax planning, I am aware that I have taxes to pay at the end of the year… isn’t that planning?” Well, tax planning is deeper than the awareness that you have about filing taxes. In retrospect, it is detailed analysis of your finances throughout the year including consideration of your state tax code (for states with income tax). This will help you plan for current or future investments and ensure a fulfilling tax year. In laymen terms, this means that you are consciously making decisions concerning your tax withholding’s, purchases, and investments with the thought of your tax filing in mind. In a way, simply planning on having your documents ready for taxes and then handing them off to an accountant, is like a game of checkers. It requires far less thought and is much easier than the alternative. Tax planning however, when done right, is a game of chess. It takes skill to plan and execute based on your personal situation, with the goal of saving tax dollars.
Benefits of Tax Planning
-Tax planning is for everyone at every income level. Having a proper expectation of your tax season outcome is what all taxpayers need. When tax planning is not done, many times taxpayers are caught off guard with a tax liability they were not expecting.
-Planning allows you to ensure to pay the least amount in taxes as possible for your situation. The tax code offers many deductions, credits, or exemptions. However, your facts of life must meet the criteria to qualify. This is where tax planning comes in
-Having an idea of what your refund will be, allows you to plan for major expenses such as a vacation or purchase of a home.
-Knowing your finances makes the IRS a lot less intimidating. Understanding your income and deductions will make you stronger on the forefront of your taxes and will ensure that if you receive a letter from the IRS, you are already knowledgeable concerning the reason they are contacting you.
How Do you Tax Plan?
1. Learn to Interpret your Tax Return
The first step to tax planning is being aware of your past years’ return. Learning to interpret your tax return is essential because it helps raise your awareness of the types of things that need to be in the forefront of your mind when you’re thinking of expanding on your financial health. Some of the typical things that you need to consider in your tax return is your filing status, dependent status, income (W-2s, 1099s, capital gains, etc.), deductions, credits and much more. Why are these important to think about? When you assess your previous return, you can see all the information involved in the outcome of your last tax return. Therefore, that is why checking your previous tax return is the very first step in tax planning. You can now optimize your financial decisions during the current tax year to utilize the tax code to your greatest benefit. Trying to understand your tax return can be overwhelming so having an accountant explain the things you don’t understand is helpful.
2. Take note of the forms that will be important for the next filing deadline.
It is important that you remember which forms are needed for the upcoming year. This will save you from throwing out information that is important. Setting up a folder of these papers and forms will save you time when your accountant asks for them. This will also help you keep your finances organized. Good accountants, aka (Access Tax and Accounting) provide you with information to help you prepare for the upcoming tax season. 😊
3. Do your research to optimize deductions
It goes without saying, nearly all taxpayers want to deduct as much as they can to save on the taxes they owe. Doing your research before speaking with an accountant will ensure that you are tax planning in a way that minimizes your tax liability. Often, there are things taxpayers can deduct that they never would have thought, so it is important to investigate your finances and do the best research to optimize these deductions. Also, many taxpayers are unaware of the type of exemptions that are available to them. That is why doing research on tax exemptions in your area is an important step in planning as well. After research and investigation, it is still helpful to speak with an accountant, as there is information out there that may not necessarily be correct. Also the terminology used in these types of articles is sometimes difficult to understand and your accountant will be able to clarify the meaning of your research as well as how it relates to your financial standing.
4. Make short-term and long-term goals
Any dedicated taxpayer who is looking to save some money on their taxes should have a goal and strategy in mind. One idea to think about is the utilization of your income to make big purchases or investments. This means that while you are tax planning, consider expenses that you must incur or want to incur so you are able to use those expenses in a way that decreases your tax liability. These big investments include a car, a house, a computer, a desk, or whatever other expenses that you will make in the current or future tax year. Another idea to think about is your long-term goals, whether that’s retirement, money for your children, or other investment accounts it’s important to think about.
Now that you have a better understanding of what tax planning is, and why it is important, you are already on your way to improve your financial status. Although there are incredible resources on the internet for this kind of information, doing it by yourself can feel frustrating. That is why having an accountant clarify important information is beneficial. Access Tax and Accounting offers a variety of services, as well as tax consulting in the following areas 75904, 75949, 77069, 77701, 77042, 75701, 75702, 75001, 77004, 76006, 76039, 75038, 75961, 77375, 77086, 77377, 77066, 75652, 77429, 77433, 77035, 77386, 77449, 77088, 77304, 77379, 75071, 76040, 77027, 77070, 77381, 77351. Access Tax and Accounting cares about your financial health and takes pride in assisting you with your personal financial plan. Call or email us today to schedule your consultation.