I am an advocate of tax planning both personally and professionally. I believe, to be a successful advocate, a person has to be passionate about what they are advocating. One of the areas in my tax practice that I am truly passionate about is Tax Planning.
When people come to me for tax advice and preparation services, I ask them why they are leaving their previous tax return preparer or CPA. Most often the answer is because they were surprised by the amount of tax they owed with the previous year’s return. To make matters worse, most found out only when they were issued the tax returns to sign and file.Even when you think you’ve got your annual taxes figured out, any of a number of life events can change that bill. If you haven’t planned ahead, that bill could surprise you at or near filing time, maybe not leaving you enough time to save for the payment due.
Some of the life events that change your tax bill are: marriage, divorce, the birth or adoption of a child, the loss of an exemption, the purchase or sale of a home, retirement and filing bankruptcy.
If you’ve got more than one of these events in a single year, then things get really complex.
If you’re working for an employer, you can use the worksheet attached to your W4 to calculate the appropriate amount of withholding each year, which may change based on those life events. I find that very few taxpayers use this form. People typically fall into one of two categories:
- Those who overpay on their income taxes to avoid owing money at the end of the year.
- Those who have less tax withheld that so they are better able to pay their living expenses throughout the year.
Let’s look at the person who wants to make sure that they overpay their income taxes: I understand the fear and anxiety that paying income taxes causes. However, I am also not a proponent of large refunds. When a return is filed by the legal due date or extension date, the IRS or state tax authority, does not pay you interest income for the use of your money all tax year.
Most of my clients could use that over paid income tax in their paycheck to pay necessary living expenses, to fund their retirement or education, to help an elderly parent, or to give to charity. Most of these expenses may be tax deductible so why give the IRS or State Department of Revenue more money than you are required to pay?
For those taxpayers who do not have enough income taxes withheld, Tax Planning is important to prevent or minimize the penalties and interest associated with underpaying your taxes. It also serves as a resolution for situations where you owe taxes that you cannot pay in full right away.
Wouldn’t you rather be a step (or two) ahead of the IRS when tax time rolls around? Consider doing some tax planning. In this instance, the old adage holds true: An ounce of prevention is worth a pound of cure.