As we wrap up the October 15th Tax Extension deadline, it’s time to think about tax planning. Is there a difference between Tax Preparation and Tax Planning? Yes, with tax preparation you are looking at history. Once December 31st of each year is over you can’t change history. Anything you could have taken advantage of to reduce your tax liability is over. All you can do is sit and wait for all your tax documents (i.e. Form 1099s, and W2s) to arrive in the mail and then hand them over to your Tax Guy/Girl before April 15th or even do it yourself and probably receive a refund or pay any tax due. Another option would be to file an Extension if your information is not ready.
On the other hand with tax planning you are taking a proactive approach. The focus is on the future. For example, receiving a huge refund year after year is a sign of no tax planning. No, it is not a savings account. Ask yourself, is it earning interest? As a taxpayer you could have used that money throughout the year to feed your kids or even invest it in your retirement plan, college education or even start a side business.
Who needs tax planning? (1) Business owners, (2) Real estate investors, (3) long term investors.
Business Owners: As a business owner you can implement tax planning through entity selection. Meaning, how you registered your business as a legal entity can have a huge impact on your taxes. As a business owner you can operate your business as either a Sole proprietor, Corporation, or Limited Liability Company. Knowing the pros and cons of each entity designation is the key to optimizing your tax strategy and maximizing your profits.
Real estate investors: Real estate can be your primary or secondary source of income. It all depends on how you hold it and make it work to your advantage.
Long term investors: It all depends on whether you choose tax advantaged investments and how you structure your portfolio.
Some of the Key Tax Planning Areas are: Entity choice, office space, retirement plan, medical expenses, paying yourself and many more. Talk to a tax planning specialist to learn more about tax-reducing strategies and keep more of what you have earned.
We take time to plan our vacations. Let’s take time to plan our finances. When you plan you are better prepared.