A very important part of personal financial planning is tax
planning. This article will help you take the mystery out
of personal tax Planning by providing a financial planning
perspective for your overall tax situation.
1. Be aware of the different types of taxes
Many people are not aware of the different types of tax
systems that we have. Income: Federal, State and Local.
Real estate tax. Tax on Investments: Dividends, interest,
capital gain, and passive income on stocks, bonds, mutual
funds, and investment real estate. Estate or Inheritance
Tax: Federal and state tax due on the estate or the
inheritor. Gift tax: tax on giver of large gifts.
Entitlement Tax: Social Security and Medicare (FICA),
Federal Unemployment (FUTA). Sales, self employment, and
corporate taxation.
2. Consider working with a Qualified Tax Professional
Tax planning can be complex for many people, therefore it
may be wide to work with a trusted professional tax advisor.
Tax advisors not only prepare your taxes but can help make
decisions that will affect your future. They can serve as
advisors for a whole host of matters and they can represent
you if you face the dreaded audit. Consider the following
when selecting a tax professional:
- Local: Someone that you can easily meet with face to face
- Personable: Someone that you can interact with and who
cares about you
- Proactive: Some tax preparers simply look at your
previous year's return and plug your current numbers into
last year's format. This of course assumes that last year's
preparer knew what he/she was doing. Try to find a preparer
who knows your situation. A proactive professional will ask
questions that will help you anticipate changes in your tax
situation to help you properly plan in advance
- Reputable: Find a professional with a good reputation.
Ask people you admire for a referral.
- Skilled: Look for an accountant that is very competent.
You have to be smart to obtain a degree in accounting or
law.
Fees: Find out up front what they estimate their fees to
be, what they charge to file electronically and whether
they will represent you in an IRS audit. Avoid any 'early
refund' ploys. Some well known tax preparation companies
'provide' this service which charges a hefty fee (with a
lot of small print) and a lot of advertised hype for you to
get your refund 'early'. It is basically a high-interest
loan. Just waiting for your actual refund will save you a
lot of money.
3. Remember, tax preparation entails both art and science
The science involves the mathematical calculations that in
most instances can be figured using calculators and
software, and the infinite number of complex tax laws.
The art of tax planning comes into play with interpretation
of any special circumstances. There are some areas of tax
law that leave the government's intentions unclear. No law
can completely anticipate each person's situation. You
could call a dozen different IRS agents with the same
question and get as many different answers. A proactive
planner will research any unusual circumstances you may
have and help you plan a course of action.
4. Doing Your Taxes Yourself?
I firmly believe in getting professional tax assistance.
However, I realize that many people prefer to do their own
taxes perhaps to save money, or perhaps you have cleaned up
the mess a 'store front' preparer made of your taxes and
vow to do your own. It has been my experience that often
the professional tax preparer has saved us the amount of
their fee in our taxes. The peace of mind that the taxes
are done right has a value all its own.
However, people who have prepared their own taxes at least
once with paper and pencil or software usually understand
taxes much better. If you self-prepare your taxes, consider
having a qualified accountant review them before you send
them in. They may find things you or the software might
have missed.
If you made less than $54,000 in 2007, you can file your
taxes electronically for free through the irs.gov website
www.irs.gov/efile/. If you use tax software and wish to
e-file be aware of the fees so that you can budget and
compare prices properly. For example, a download of Turbo
Tax Home and Business Federal and State for 2006 cost just
under $100 and the filing fees cost around $30. Some States
allow you to 'phone in' your State return for free.
If you choose to mail your return, go to your local post
office and send it 'Certified Return Receipt' mail to
insure that you have a record that the IRS received your
paperwork. This will cost around $10 or less and will be
worth every penny should the IRS contest the receipt of
your return.
5. Keep great records
If you are already very organized you may read this section
just to feel great about your organization skills or skip
to the next section. If, however you have heard 'get
organized' many times before and if you are the type of
person who balks at the idea of organizing that mess of
receipts just remember how you felt last year as tax time
approached. You could become organized in only one evening
of television viewing with the right tools. Arm yourself
with an accordion file with at least 16 sections. Label
them according to your situation or use the following
sections: Auto, Bank, Business, Credit Cards, Dental,
Medical, General Receipts, Grocery, Income, Insurance,
Mortgage, Utilities, School, and Taxes. Now sort your
receipts into these sections. Organizing your receipts
will help you "Take the mystery out of..." your financial
situation. Use a new accordion file every year. Not only
will this help you find needed information, it will also
help you find a receipt in case you need to return an item
you purchased. . Your tax professional will be sending you
a tax organizer the end of December or the first of
January. In this organizer will be a list of information
that you will need to gather. Becoming organized will help
you easily gather the information you need to fill out your
tax organizer.
6. Start early
Do not procrastinate on your taxes. Tax professionals are
unbelievably busy January through April. Firms who prepare
business returns also have a crazy March 15 business
deadline. We are providing this information because we
want you to get the most attention from your preparer
during their craziest season. As soon as you get your
organizer, begin gathering the needed papers. If you are
only missing one or two pieces of information return the
organizer to your accountant with a note that says what is
missing. They will begin entering the information in their
software. Try to get a January or February meeting with
your accountant. These months are the best to meet because
they will have more time to spend with you and they will be
able to think proactively. If you are looking for a
professional, start looking now.
Another reason to start early is allowing yourself time to
look for records, ask financial institutions for copies of
lost information, or calling investment companies for
statements.
7. Judicious Paycheck Tax Withholding
Many people like to overpay their taxes, so that they get a
nice refund in time for vacations or other wants and needs
- Kind of like a forced savings. Overpaying taxes is like
a giving the government an interest free loan of your money.
Good financial management involves developing savings
habits so that you set aside money in an interest bearing
account from each paycheck for future needs, wants and
emergencies. This helps you to avoid using credit cards for
those things and not having to wait until refund time.
Secondly it then allows you to manage how much you can
afford or are able to put into 401(k) plans at work. This
accomplishes two things, first you are managing your money
better and you are saving for retirement. Saving for
retirement in tax deductible retirement plans like 401(k)s
will also lower your taxes, enabling you to save more for
retirement and everyday needs and wants.
If you want to lower the taxes that are being withheld from
your paycheck, file a new W-4 form with your employer to
claim an additional withholding. Make adjustment for
getting married, divorced, having children and for
increasing contributions to tax deductible retirement
plans. Your accountant will help you estimate this.
8. Tax planning is not the tail that wags the dog
Taxes consume a large if not the largest single percentage
of your income, therefore good financial planning should
strive to lessen them, by whatever means possible as
allowed by law.
However, tax planning is not the only core issue of good
financial planning. Tax planning works in concert with
your overall goals and your individual situation.
----------------------------------------------------
Kent E. Irwin, ChFC, CLU, CAP, co-founder and CEO of
eFinplan.com. eFinPLAN is the first and only web-based
comprehensive consumer financial planning software designed
for people who are trying to do a lot of their own
financial planning. Find out more about how do-your-self
financial planning and how to reach your goals at: =>
http://www.efinplan.com/
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