With 2017 coming to an end, have you scheduled your year-end tax planning meeting with your accountant?
Or are you just waiting until April to see how it all worked out? If this is you, let me introduce you to the concept of Tax Planning.
What is Tax Planning?
Tax Planning is simply the process of working with your accountant to:
- Estimate your total income for the year, and
- Define actionable steps you can take to reduce your tax burden
Why Hasn’t My Accountant Done This Before?
As discussed in last week’s blog “Why I Fired My Strip Mall Accountant & How to Hire the Real Deal”, all accountants are not created equal.
I had to change my accountant to begin a Tax Planning process. This has provided me with significant tax savings each year. I can now take the additional money invest it in my business or purchase additional assets.
What is Involved?
The Tax Planning process is unique from accountant to accountant. It will also depend on the size of your business and amount of assets. However, they do typically follow the same set of questions.
What’s changed from last year?
Assuming your tax plan from last year was good, there may not be any significant changes with your tax strategy.
Any personal changes that could impact your taxes?
Examples include an additional child, retirement, divorce, Roth conversion, and required minimum deductions from your retirement plan.
What TYPE of additional income do you expect?
Is it Passive? Active? Portfolio? This will help your accountant determine which tax-saving strategies are applicable to offset the additional income.
Is the additional income going to be repeated next year?
There are different strategies that can be utilized for a single event (inheritance, asset sale, etc.) vs consistent additional income from your business or assets.
When Should You Have a Tax Planning Meeting?
The goal is to have the Tax Planning meeting late enough to be able to answer these questions, yet early enough to act on them. This is typically in October or November. Most accountants prefer these meetings after the October 15th extension deadline as they are normally very busy at that time.
What Actions Can Be Taken?
You and your accountant should work together as a team to discuss tax-saving strategies to reduce your taxes. Our goal at the Investor Advisory Network is to educate you on some of the best tax and wealth-creating strategies we have learned through the years. Being educated on these is critical to the success of your team and building your financial freedom.
Here’s a list of potential actions you can discuss with your accountant. We have covered most of these strategies in earlier blogs. Please go back and read them if they are not familiar. Those that have not been covered will be addressed in future blogs.
- Salary VS Distribution
- Home Office Deduction
- Automobile Deductions
- Business Travel (taking one more trip for your annual meeting)
- Tax Credits
- Shifting assets to lower tax brackets (e.g. children, parents) via hiring or gifting
- Funding your flexible spending accounts (FSA’s) and health savings accounts (HSA’S)
- Retirement contributions
- Business Expenses – purchase those year-end items such as computers, phones, printers or other equipment needed.
- Tax loss harvesting- taking a loss on an asset held for over a year can be used 1:1 to offset capital gains from another asset. Remaining losses can be used against ordinary income (up to $3,000/year) and carried over for future years with no expiration.
- Differ income to next year
- Charitable Contributions – contributing appreciated assets directly to a charity enables you to deduct the entire value of the asset and avoid any capital tax liability if you were to sell it then contribute the cash. You save on the capital taxes, deduct the full value of the asset and the charity receives the entire value of the asset. A win-win-win.
- Family Gifting. You can transfer up to $14,000 per person for 2017 without triggering a gift tax.
The Journal of Accountancy has a great article, “Tax Planning for Millennials” that may be helpful for you millennials or parents of millennials.
Don’t Let the Dog Wag the Tail
There are a lot of tax deductions, credits, and investments out there that may not fit into your wealth or tax plan. Don’t make an investment or purchase tax credits simply to save on taxes. They should fit into your overall Wealth Plan.
For example, oil & gas investing provides a great tax deduction but if you don’t understand and qualify the investment you shouldn’t do it just for the tax deductions. Don’t make the same mistake I made a few years back.
What About The Tax Reform Bill?
It’s impossible to predict the outcome of the tax reform bill being negotiated or if it will even pass and impact our taxes in 2017. Sean and I are just moving forward to develop our plans. We’ll adjust them as needed – or should I say IF needed.