Lessons from the Pros


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!

Access Free Financial EducationOther 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.

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.

DISCLAIMER 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.

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