Three kinds of taxpayers are doing their taxes incorrectly: those who are waiting for a refund, those who are dreading doing their taxes, afraid of owing as much as they did in the prior year, and those who have actually haven't got a clue as to what their taxes will look like once the dust settles. What they all have in common is insufficient planning, and each of them should take time to sit down with a Certified Public Accountant (CPA) and start planning for next year - because good tax planning never leaves money on the table.
It's Really Never Too Early to Plan
Make an appointment with your CPA to discuss strategies for getting your tax down to the ideal number - zero - as soon as your taxes are filed. When you find you'll be receiving a refund, don't ever think that the government doing you a favor – it's your money, but you inadvertently provided them with 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 feels like an uncertainty, 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 should sit down and see what areas of your tax planning require course correction. Several key questions must be asked and answered during the planning sessions.
1. Are itemized deductions worth it?
Depending on your marital status and types of income, you could be better served by using itemized deductions, despite the fact that standard deductions can simplify tax preparation. Changes in tax laws year after year can eliminate certain itemized deductions, but the trade-off isn’t always cut and dried. This is why it's always advisable to consult a tax professional who is well-versed in the current tax laws.
2. Is your retirement plan best suited for your tax situation?
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. Once again, a tax advisor is best suited to evaluate the different scenarios, ensuring that 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 will evaluate which will be the most beneficial to you.
4. What are your long-term investment strategies?
While this might not help you next year, it could be well 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, which are taxed differently than income. Your CPA will help to pinpoint the asset strategies that will work best for you.
Remember to 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 opportunities slip by without proper annual tax planning, and the future horizon becomes much shorter. Tax planning is never about a single year in isolation; it's about regularly scheduling strategic tax planning meetings to maximize your overall wealth.
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.