Tax planning, tax planning! What does this mean for you, dear reader? An opportunity! An opportunity to glimpse your tax future and prepare, to change that future, and become free from the fear of the unknown. Now that’s something to be thankful for!
Now's the time to seize the moment and tax plan. Here's why.
For most of us, the New Year means a different year to account for our expenses in terms of taxes—that is, most expenses paid after December 31st must be accounted for in that new year. Put another way, expenses paid in 2015 are always included in that years taxes, with a few exceptions.
The same goes for income—receipt of income in 2015 is reported on the 2015 tax filings. And so, like most beginnings, a new tax year also brings the finality of an ending; once the year is over an opportunity for tax planning is lost, as one can no longer choose to spread expenses and income over the old and new years in a way that mitigates their tax liability. As the leaves drop in the dusty grey dawn of fall, so the door of the year slowly closes as we approach December 31, 2014. Once that door closes, it stays shut, regardless of who turns the knob.
"...like most beginnings, a new tax year also brings the finality of an ending; once the year is over an opportunity for tax planning is lost..." [Click to Tweet]
Many people have heard the usual tax planning advice: to accelerate income in a slow year; to defer income in a high-earning year; to use retirement vehicles; to prepay state taxes; to move medical and dental work into one year; if free from the alternative minimum tax, to donate…etc. etc.
Thinking outside the box of the calendar year: Ideas on tax planning for your business
What many people may not realize is that there is no income averaging option in today’s tax world. Therefore, when a taxpayer has a high earning year, and pays tax at a high rate, that additional tax incurred will never be recouped—even in a lower earning year. That is why it’s best to try and maintain a consistent income stream from year to year whenever possible. Retirement vehicles are one such way to defer income and maintain consistent income over multiple years, since many times the payment into the retirement fund can be extended to either April or October of the following year.
But what about broader advice? Let’s talk entities for those who own a business. Are you a sole proprietor, one who wrestles with the schedule C tax form year after year? If so, you should ask yourself whether your business has outgrown the usefulness of a sole proprietor entity. The larger income shown on your schedule C tax form could make you an audit risk. If this is the case, it’s helpful to know that one good way to mitigate that risk is to consider a different entity selection for your business, such as a sub-chapter S corporation. Remember, the schedule C tax form is one of the most audited form in the country. You may be the large fish in a small pond, and this could make you an easy target for the fisherman.
Are you an S corporation owner? If so, you may want to make sure that your payroll withholding covers your 2014 tax liability. Are you taking advantage of the opportunity to take distributions from your lovely S corporation entity? Many people are unaware that one way of taking cash out of an S corporation is through distributions, which are a means of receiving money from income that has already been taxed.
Don't let the happiest day of your life be the biggest tax mistake of your life: Tax planning for engaged couples
This one's for all you starry-eyed folks planning a marriage. Don't let Uncle Sam be the one to sweep you off your feet! Ever hear of the marriage penalty? Well it’s a party-crashing monster that exists both on a federal level, as well as within certain states, such as New York.
The marriage penalty is based on the notion that getting hitched results in two independent people subsequently acting as one agent (which anyone who’s been married can tell you is far from reality). Nevertheless, due to this notion, marriage results in the incomes of equal-tax-bracket spouses being combined and treated as if the two incomes were one (and thereby being taxed at one rate) thus potentially moving the couple’s income into a higher tax bracket than each independent income stream taken on its own.
Ouch! That additional tax can take a big bite out of the honeymoon. Mitigate this by tax planning for your union. In addition to the income of each happy soon-to-be newlywed, large bonuses and payouts should also be taken into consideration, as well as any other material income or expense item.
So, in closing, it’s always good to know what you know, but even better to know what you don’t know. Tax planning: it's all about getting to know what you don’t know. If you don't want the IRS to gobble-gobble up your cash, make sure to tax plan! For more information, please feel free to contact us and schedule your free tax planning consultation.
Have a great Thanksgiving!