Have you ever thought about doing your taxes and cringed? Not only because of trying to pull together all the documents but also worrying about if you will have to pay in extra in tax or do you maybe get a refund? “If you fail to plan, you are planning to fail.” This quote from Benjamin Franklin couldn’t be truer than with tax planning. Tax planning is important for individuals as well as businesses.
What is a Tax Plan?
Tax plan can be done at mid-year but should be done multiple times during the year. The goal is to assess your current situation and leverage tax expertise to forecast your financial situation for the current year and beyond. It takes the guesswork and stress out of your situation but it can also create opportunities to adjust your strategy.
What are some of the tax strategies?
- Retirement contribution – this is the best strategy to play because not only do you get to reduce your tax due, you get to KEEP your money and invest in your future.
- Charitable contributions – not only do you get to support your favorite cause but you also get to reduce your tax due. Make sure that it is a qualifying charitable organization to get your deduction.
- Investments – selling and buying almost anything can and will trigger a taxable event, so you need to have a strategy in place to maximize and minimize your growth and taxes.
- Timing of purchases – buying equipment or other assets for your business can really help to offset your income. Understanding the right time to make that purchase is critical to saving on your tax bill and maximizing your cash flow.
The number of tax strategies are never ending and always evolving. Taxes are heavy political. Every four years taxes are at the forefront of every candidate’s strategy to be elected. The uncertainty of everyone’s tax and financial situation is almost in a constant state of disarray. If you would develop a strategy for your finances you would be able to take advantage of the tax breaks or you will be able to pivot your strategy if the strategy in place needs to be changed.
For example, in December of 2017 the TCJA was passed, this allowed people with capital gains to sell their investments and move it to real estate and defer their capital gains tax, then they could reduce that tax and down the road sell that new asset and pay zero capital gains on that new asset.
If you didn’t have a strategy in place it would be almost impossible to take advantage of this and in turn potentially wasting an opportunity. In addition to all of this, a tax plan can also help you make sure you have the right withholding in place and take the guesswork out of it.
- Maybe you are on track to get a refund and you can adjust your withholding to get more in your check each month instead. Keep in mind, while it seems like getting a refund is the goal, all it means you actually gave too much money to the IRS throughout the year and they were using it interest free.
- Maybe you have not been withholding enough throughout the year and you can adjust your monthly withholding to deposit extra and not have a huge bill at the tax filing time.
A tax plan is one of the important tools towards your financial success. Do not squander your opportunity and get with your CPA as soon as possible so you can make necessary changes before December 31st.