Many taxpayers believe a good tax preparer will save them money. While I would agree with this, there is only so much a tax preparer can do to minimize taxes when preparing your return. Where the rubber meets the road – where you really save taxes – is tax planning.
When is the best time to do tax planning? Anytime is better than never. Start now if you haven’t already! Once you have your long term tax game plan laid out you’ll still need regular course corrections. The best time for this is around October to November, referred to as End of Year Tax Planning.
Tax planning in early in March or April isn’t ideal because only a few months have passed; and any trader or business owner knows a lot can change in 6-9 months. Late Fall is ideal because there’s less uncertainty yet still enough time to implement game changing tax decisions, like incorporating or setting up a self-directed retirement plan.
There’s 3 main types of tax planning:
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Timing of income recognition
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Shifting of income amongst taxpayers and jurisdictions
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Conversion of income among high and low rate activities
A Dollar Today or a Dollar Tomorrow
Common income deferral strategies include contributing to qualified retirement plans, 1031 exchanges, and installment sales. Among the many ways to accelerate deductions are prepayment of deductible expenses, electing Mark-to-Market for trading securities, Sec. 179 and Special Depreciation, and carrybacks of futures losses.
Common advice is to defer income and accelerate deductions, but sometimes the opposite is recommended. This has to do with what’s called the Time Value of Money. Essentially, if I had $1,000 now I could invest and grow it, making it worth more in the future. But this isn’t recommended for every taxpayer. At OTA Tax Pros, when we make tax planning recommendations, we take into account future tax law changes, individual circumstances and how you invest and grow your money.
Income Shifting
Holding companies, Nevada corporations, family trusts – you hear about them all over the media. But perhaps the most overlooked income shifting strategy is among family members.
Parents can “gift” investments to children to be taxed at a lower tax rate. Kids under age 24 are subject to Kiddie Tax rules, grandparents should be cognizant of the Generation Skipping Transfer Tax, and gifts are subject to Gift Transfer Tax rules. But in the right situation and planned properly, this method of income shifting has the potential to save thousands. However, this is definitely an area that requires competent guidance, so make sure you coordinate with a competent tax advisor.
Not All Income is Created Equal
With long term capital gain rates lower than ordinary tax rates and passive activity losses treated differently than capital gain losses, which aren’t as beneficial as net operating losses, it’s easy for any taxpayer to get lost in the confusion of tax code.
In general, tax advisors will suggest ways to convert ordinary gains and income to capital gains. The opposite applies for losses. There’s also strategies that may recommend converting capital gain income to earned income to enable contributions to a Roth IRA or Solo Roth 401(k) which becomes non-taxable income.
Cost of Not Tax Planning
We often hear students say, “I’ve been with my tax preparer for 20 years and they never recommended that strategy!” Well perhaps that’s all their preparer is – a tax return preparer – not a strategist, consultant, or advisor.
Failing to plan doesn’t just mean failing to save taxes. Attempts to minimize taxes after a tax liability has already been incurred runs the risk of being considered tax evasion. However, using a tax strategy to plan and properly account for transactions before the tax liability is created is perfectly legal and even recommended by the IRS.
Finding a competent tax advisor isn’t easy. Visit our website at www.otataxpros.com and we’ll point you in the right direction.
This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions. The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Reproduced by permission from OTAcademy.com click here for Terms of Use: https://www.otacademy.com/about/terms
Editors’ Picks
EUR/USD stabilizes near 1.0800 as trading action turns subdued
EUR/USD holds steady near 1.0800 on Thursday and remains on track to end the day in negative territory following upbeat macroeconomic data releases from the US. The action in financial markets turn subdued as trading volumes thin out heading into Easter holiday.
GBP/USD extends sideways grind above 1.2600
GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth help the USD stay resilient against its rivals and limits the pair's upside.
Gold pulls away from daily highs, holds above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays near 4.2% after upbeat US data and makes it difficult for XAU/USD to gather further bullish momentum.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.
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