Importance of Tax Planning

Importance of Tax Planning

By Ron Dubois, CPA

www.ronduboiscpa.com



Does anyone like unexpected or unnecessary income taxes?

I have been a tax professional during the past 25 years and I have seen many people pay more taxes than would have been required by law simply because they were not familiar with the current tax regulations and they did not know they could strategically plan ahead for taxes. It is important to know what the tax laws are so that you can plan a transaction and know the consequences of your choices before it is finalized. Most people don’t think about their tax situations until it is too late and you are filing your return. For this year, at least, your ship has already gone aground.

It pays to plan ahead.

Tax situations that can change during the year include changing jobs, working a second job, changing from being an employee to being an independent contractor or self-employed, getting married, getting divorced, becoming unemployed, selling property, selling a business, having or adopting a child, or taking a withdrawal from a retirement account. All these events affect the amount of taxes you will pay. Unfortunately, many times it results in unexpected additional money being owed at the end of the year.

How can you avoid owing additional money at the end of the year?

You do it by taking corrective action during the year. I always encourage my clients to contact me if their tax situation changes in any way or if they’re going to do anything that they think may impact their taxes and to run their plans by me “before” they do them. This gives me the opportunity to advise them of what the tax consequences could be, and what they can do so they don’t wind up owing a lot of money at the end of the year.

To help illustrate this here are some real examples I have seen. A single client purchased a new home and took money out of an IRA for the down payment. The IRA withdrawal combined with her wages exceeded the income limit for the First-Time Homebuyer Credit and she ended up being disqualified for half of the credit due to her income being too high. In another instance a client sold a rental property on December 31, 2008 and was required to pay the tax on the gain by April 15, 2009. If the property had closed on January 2, 2009 this client would have had an additional 12 months in order to pay the tax by April 15, 2010.

Good planning and knowledge of current tax rules will save you time and give you peace of mind with your finances.

Use of any information referred to is for general information only and does not represent personal tax advice either express or implied. You are encouraged to seek professional tax advice for personal income tax questions and assistance.