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Tax Planning

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Steven E Miller, CPA PC

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What Is Tax Planning Anyway?

Tax planning is more than April 15 or October 15. Anytime there's a financial milestone, buying or selling a business, marriage, divorce, college or retirement may have tax consequences. 

Most people only think of their taxes leading up to the tax return due date. However, CPA's are trusted advisors who can help with a variety of financial issues and their tax consequences year-round.

Tax planning is an opportunity to consider how certain financial decisions will impact all areas of your life, and take proactive actions. 

We are creatures of our environment. So much of what we absorb comes from the media whether that be television, the internet, the radio or written. But in today’s world, the attention span seems to rate only about five to ten seconds our of time. So let me provide a brief description of what tax planning is all about.

  • Tax Planning is typically perceived as a generalized concept such as defer income and accelerate your deductions just before the end of the year. Then you are done.

In today’s extraordinarily complex tax world, such generalizations are not only wrong but dangerous to your wealth. So many taxpayers don’t stop to consider whether tax planning would have any positive impact. Many think in terms of what can tax planning do for me now and never stop to consider that tax planning isn’t just about today or tomorrow… it is about the long-term.

Consider this: Tax planning is like fire prevention while Tax Preparation is like arson investigation. Many don’t believe that tax planning offers any real benefit to them. But I beg to differ. Tax planning (and long term tax strategies) offer significant tax savings and benefits! It is simply a case of you don’t know what you don’t know what tax planning has to offer.

A few examples for your consideration

A small business owner with a spouse and two children offers so many opportunities for long term tax strategy, we don’t have room to list them. But to mention a few would include:

  • Considering how the business is set up (LLC, corporation, sole proprietorship) to reduce their exposure to IRS audit;
  • Employing the children to fully fund Roth IRAs each year later used to pay for education;
  • Considering what type of retirement plan most effectively shelters income from tax while reducing the costs of employee matching;
  • Is the owner risking very large penalties from the Affordable Care Act [ACA] because they didn’t know they were in violation of the rules?
  • What opportunities exist to reduce the FICA/Self-Employment taxes the owner is paying?

Taxpayers are within five years of when they wish to retire. They worry about having “enough to retire on” but don’t really know what that is.

  • What budgeting plan have they created? Do they have any idea what they will actually need to live on?
  • What steps can be taken now to reduce their taxable retirement income so their qualified dividends and capitals would be tax free income or taxed at very low levels?
  • What choices do they have in how they begin to claim Social Security benefits such as filing and suspending, claiming the spouse’s SSA benefit while suspending theirs, etc.
  • How will Social Security benefits affect their tax liability? SSA benefits may incur an effective tax rate exceeding 50% if you aren’t careful.
  • What opportunities now and later are there to convert retirement income to tax-free income through Roth IRA conversions?
  • How will required minimum distributions [RMD’s] affect your tax bill during retirement? Will they create a “hidden tax” by substantially increasing your Medicare insurance premiums?

Let’s take the case of lower income taxpayers. They don’t believe tax planning or strategizing offers them any significant benefit. But a young person subject to the 15% tax bracket has a number of opportunities to save both now and for years in the future.

  • Investing in a mutual fund generating qualified dividend income and capital gains offers tax free income for those in the 10 or 15% tax bracket.
  • As wages increase, you may be able to stay in the lower tax brackets by making contributions to a 401k plan AND getting “free” money from the company matching plan.
  • Never overlook the opportunity to contribute to a Roth IRA. Creating taxfree investment capital while Congress continues to spend like drunken sailors and create ever larger government debt burdens does not predict lower tax rates in the future.
  • $1 million dollars saved in a Roth IRA is worth $1 million dollars. $1 million dollars saved in a traditional IRA might only be worth $600,000 or less after tax. It IS about what you keep and not so much about what you earn.
  • Building a small fortune is much more about time and long-term patient investing than brilliant investments and timing. Remember the Turtle and the Hare from Aesop’s fables?

A corporate executive, manager or employee is granted incentive stock options [ISO’s], nonqualified stock options [NQSo’s] and/or restricted stock. Do they have any idea of how to plan? Or do they do what everyone else at the company does? Are all those other employees experts in stock investment and taxes?

  • From my experience, even the CEO’s of companies had very little idea of what to do with their options and stock grants. ISO’s offer a terrific potential for tax savings and investment gains. But those are all dependent on the company they work for, the condition of the stock market and their own risk tolerance.
  • Alternative minimum taxes [AMT] potentially have a significant risk to the option holder. But planning and strategizing with AMT is very counterintuitive. For many executives, AMT may actually provide a potential tax savings opportunity. And given all the negative press you hear about the “dreaded AMT”, who would expect that?

Each and every taxpayer’s case is different. While it is easy to make assumptions and apply cookie cutter solutions, the correct answer for each taxpayer should be customized to what will work for them. Nor is developing a tax strategy a static event. You don’t sit down and create a plan and then never have to do any additional work. Tax laws are constantly changing. Your income and deductions rarely stay the same.

It all boils down to taking action. Developing a long-term tax strategy offers so many benefits and savings adding up to potentially tens of thousands of dollars or more. Is that worth some investment of your time?

If you never invest time for planning and creating a long-term stragey, you will never enjoy the benefits. But then again, you probably won’t realize what you missed out on. Is that a case of “ignorance is bliss? Perhaps not!

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15150 Preston Rd. Suite 210 , Dallas, TX 75248
Call Us: (214) 361-1131 • Fax: (214) 253-2138