Prevent Costly Mistakes With These Tax Planning Strategies
Life is full of mistakes. It’s easy to recover from the small ones and move on. Making mistakes when filing your tax return can be very costly and harder to
recover from. You can lose tens of thousands of dollars in unnecessary taxes, as well as paying penalties, interest and representation fees.
Let’s talk about your investments.
Long term capital gains come with a favorable 20 percent tax rate. For high income taxpayers it can save
as much as 19.6 percent off the ordinary income rate. Short term gains are taxed at your ordinary tax bracket which can be as high as 39.6 percent!
Knowing when to sell becomes critical. If you can sell long-term investments before you sell short-term investments, you can save thousands of dollars. You
can also offset your gains with accumulated losses from prior years or from other positions you currently hold that are in the red. Proper tax planning
can also bring your long term capital gain down to 15 percent. All you need to do is make sure that your taxable income is below $464,850 if you are married
or below $413,200 if single.
It is essential to have a tax professional and create a strategic plan at the beginning of the year so you can mitigate the situation throughout the year. The
alternative is to be stuck with a large tax bill at tax time when it’s too late to reduce your taxable income.
Look at this recent example. A new client approached our firm a few weeks ago seeking advice on selling their business. The expected gain is $700,000. We
immediately suggested several income deferment strategies that will allow us to spread the income over 2 years and to bring her taxable income below the
$464,850 mark. These strategies will save her over $35,000 in federal income taxes alone!
Other costly mistakes involve our retirement accounts. A common mistake occurs when taxpayers want to convert their retirement account into a
Roth IRA. Many don’t realize that there are taxes owed on these conversions and that the taxes can’t be paid from the retirement account but only from other
financial sources. They often times make the mistake of converting the entire amount, bumping them into the highest tax bracket. A better approach is to work
with a tax professional and gradually do the Roth conversion.
Tax planning is always the most important thing one can do to reduce tax liability. For example, consider looking into income tax reduction strategies, such as
selling passive losing investments such as real estate and investments you made in other businesses.
Early retirement can also lead to paying big tax bills. Many people retire at 55 and think they can withdraw funds penalty free. This is not true. Withdrawals
prior to age 59 ½ are still subject to the 10 percent early withdrawal penalty. If you take out $150,000 the penalty alone is $15,000 and this is on top of the
ordinary income tax you will pay on the distribution.
Let’s also not forget the Required Minimum Distributions at age 70 ½. Not planning for these mandatory withdrawals can cost you in thousands of unnecessary
taxes and penalties. Once again, proper tax planning can minimize your tax liability.
Let’s go over some common tax mistakes business owners make.Some business owners are afraid of the IRS to the extent that they leave “money on
the table” by not claiming legitimate business deductions such as the home office deduction or auto expenses. If the deductions are valid and can be substantiated
you should claim them!
Another common mistake is that business owners fail to pay self-employment tax properly. When you are an officer of a corporation you are required to issue to
yourself a reasonable salary. Paying too low of a salary leads to IRS examinations and penalties. Paying too high of a salary leads to unnecessary taxes that
add up to thousands of dollars. Seek advice from your professional tax accountant.
Lastly, choosing the wrong business entity can create an array of problems including unnecessary legal exposure, overpayment of self-employment taxes, double
taxation and many other problems.
In closing, tax planning is a key ingredient to avoid all the mistakes we covered and many other mistakes we did not. Be proactive and seek the right tax
professional. It’s worth tens of thousands of dollars for you and can help you build your wealth faster and preserve it better.