Three kinds of people are doing their taxes incorrectly: those waiting for a refund, those dreading owing as much as the year prior, and those who have no clue what their taxes will look like once the dust settles. If your taxes are anything other than zero, it is time to sit down with a Certified Public Accountant (CPA) and start tax planning for next year.
It Is Never Too Early to Plan
Make an appointment with your CPA to discuss strategies for getting the tax number down to zero as soon as your taxes are filed. When you receive a refund, it is not the government doing you a favor – it is your money, and you effectively gave them an interest-free loan. If you have a significant amount owing, there are plenty of strategies to reduce that tax bill – but you must plan ahead. If tax time is always a coin toss, your CPA can help you develop ways to ensure more predictable results.
Now that you have a handle on what this year looked like, you and your CPA can sit down and see if any of these areas need course correction:
1. Itemizing or standard deductions?
Depending on your marital status and types of income, you may be better off using itemized deductions, even though standard deductions can simplify tax preparation. Recent changes eliminated many itemized deductions, and the trade-off isn’t always so cut-and-dry. It is best to work with a professional on this.
2. Are you maxing out your retirement plan?
By increasing your 401(K) or IRA, you can lower your taxable income, trading the tax deduction now for when the money is taken from the account after retirement. But the IRA is not the only option. Sometimes, a Roth IRA (where you pay taxes now and not later) might be the smarter choice. Again, a tax advisor is best suited to evaluate the different scenarios so you come out ahead.
3. Are you optimizing your health care costs?
Not only are there deductions for total medical expenses, but if you use a health savings account, it is considered tax-advantaged. You can put funds into your HAS from your paycheck pre-tax or do it post-tax. Your CPA can evaluate which would be the most beneficial to you.
4. What are your long-term investment strategies?
While this might not help you next year, it will be worth it in years to come. One of the best tips for wealth-building is to have a one-, five-, ten- and twenty-year plan. So, while other strategies focus on tax reduction, elimination, or deferrals, long-term planning focuses on assets taxed differently than income. Your CPA will pinpoint the asset strategies that will work best for you.
Start Early and Finish Strong
Once your taxes are reviewed, your CPA will be able to offer specific tax-planning advice that keeps money in your pocket and makes it work for you. Wealth-building takes some time, but it accumulates year over year. The yearly opportunities slip by without proper annual tax planning, and the future horizon becomes much shorter. Tax planning is not about a single year in isolation; it is strategically planning each year to maximize your overall wealth and is a strong complement to overall good financial planning.
It's never too late to work with Myrick CPA on tax planning. We'll start you on the path of enjoying more predictable tax seasons. Contact us today to schedule a consultation.