What exactly is tax planning? And why should you care?
This goes without saying, the US Tax Code is complex, confusing, and something not many people enjoy studying or learning about! And for many of my clients, they worry about income taxes and want to know what options they have to minimize their taxes. So let's dig in on what exactly "Tax Planning" is, and how we deliver it for clients:
Tax Filing - Is essentially looking at the rearview mirror
Tax Planning - Is essentially looking out the front window
For our clients, we work with their accountants and CPAs to take data from the prior year (filing) and use that to plan for the year ahead. You have essentially 12 months, January through December, to plan for what your taxable income could look like.
And if I've learned one thing from advising clients, they all HATE SURPRISES! Especially tax surprises.
For those who are still working - some of the key metrics we review per year to ensure proper tax planning:
1. Did their familial status change? New kid? Divorce? Kid is now grown and no long a dependent?
2. Did they get a significant raise, or loss of income? Do they have RSU/ISO stock payouts this year?
3. Do they need to pay for a large expense, and want to review selling stock, ETFs, mutual funds to do so? Or is money coming from a Roth IRA or IRA?
4. Are they moving to a new state? Potentially one with no income tax?
5. Are they spending more where they can "Itemize" deductions? Things like State, Local income taxes, property tax, mortgage interest and charitable giving.
6. Are they making charitable gifts? How large are these per year?
In all of these situations, I work with clients to help them plan for what they could owe, or potentially how they can save money.
I am not one who says people need to find "Tax Loopholes", the tax code is very straight-forward and provides opportunities and laws in the Internal Revenue Code to plan smartly. How is that done?
- Knowing what your income tax brackets are - income taxes are progressive, meaning you pay more on different tiers of income.
- Knowing what deductions you can take, or those you cannot. In addition to any credits such as the Childcare Tax Credit, or Qualified Business Income (QBID) deduction for the self-employed.
- Being aware of total income (Adjusted Gross Income) and how that can determine healthcare subsidies, or Medicare Premiums for retirees.
- Reviewing capital gains on selling of securities or real estate and even businesses and the net tax implications of doing so. While also reviewing ways to minimize capital gains by taking losses, and determining short-term versus long-term gains and losses.
- Reviewing how tax planning changes when clients retire, and they no longer have W2 incomes and taxes automatically withheld.
Tax planning is an ongoing, every single year, process we help our clients with! It is important and utilizing the client's tax professional is key for successful incomes.
If you haven't had the opportunity to do a deep dive into your annual income, and tax planning, please reach out and I am glad to help.