As we approach the end of the year, 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 done 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 Professional before April 15th or do it yourself and probably receive a refund or pay any tax due, or 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 current and future financial goals. 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 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, retirement plan, medical expenses, paying yourself, and more. Talk to a tax planning strategist to learn more about tax-reducing strategies and keep more of what you have earned. It’s not how much you make, it’s how much you keep!
Proactive tax planning is the key to reducing taxes. When you plan you are better prepared.
Esther Phahla is a Certified Public Accountant and Certified Tax Strategist in Temecula. She also holds a Master of Science in Taxation. She is the Author of Tax Planning books: “Why Didn’t My CPA Tell Me That” and “10 Most Expensive Tax Mistakes That Cost Business Owners THOUSANDS”. Esther is passionate about proactive tax planning being the key to reducing taxes. She can be reached at (951) 514-2652 or visit www.estherphahlacpa.com.