Tax Planning: Where Rubber Meets the Road

Thomas Jones
Tax Manager

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?Tweet: 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:

  1. Timing of income recognition
  2. Shifting of income amongst taxpayers and jurisdictions
  3. Conversion of income among high and low rate activities

If you are not doing any tax planning, you could be costing yourself a lot of money.

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.

lftp-ota-tax-pros-ptw-280x160Parents 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 and we’ll point you in the right direction.

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.