How planning in the summer can lead to savings next spring

Most Americans don’t spend their summer months thinking about taxes. Once April 15 is behind you, your mind turns to more cheerful subjects and you take a much needed break from worrying about what you owe to old Uncle Sam. Yet while you may view taxes as a seasonal obligation that requires attention just once each year, there is actually a distinction that you should understand. The tax work that takes place in the spring is generally tax compliance. By the time March and April roll around, the amount of tax you owe is pretty much set. Qualified advisors with the right experience and the right approach will often come to the same objective tax calculation. In short, once it is what you think of as tax time, there is often very little that you can do to save on your taxes.

What many taxpayers don’t understand fully is the importance of tax planning. Tax planning generally takes places throughout the calendar year and can have a dramatic effect on the taxes you will owe next spring. Most Americans participate in tax compliance every year. Far fewer take advantage of the many opportunities for tax minimization that tax planning can uncover. In fact, unless you want to pay more tax than required, proactive tax planning is a really good idea. And like tax compliance, tax planning must also be done at the right time – many tax planning opportunities require action in the year preceding your spring tax filings.

Why is the summer important for tax planning?
Tax planning isn’t so much a seasonal activity as it is an activity that must be done in a timely fashion. Your spring tax filings are generally nothing more than required reporting for taxes due from the prior year. They are a statement of what has happened in the previous year, including income earned, expenses and deductions and even investments and incentives available. By the time your tax filings are due, most opportunities for savings have passed.

Individual tax planning opportunities are frequently tied to health care, retirement and investments. Many employers provide limited opportunities throughout the year to make changes to your elections. Other tax planning opportunities, such as IRAs, Roth IRAs, 529 savings plans and more require contributions by a specific date in order for you to receive benefit in that year. Timeliness and planning are everything when it comes to personal tax planning.

Business owners often have even greater opportunities for tax planning. Your business entity type, industry, participation in the business and other factors can all lead to different opportunities for tax planning. For businesses themselves, many incentives require contemporaneous documentation or specific actions during the tax year to claim benefit on your next return. In either case, tax planning is almost always best conducted well before tax compliance.

What tax planning opportunities should individuals consider?
The easiest way to participate in tax planning is to optimize your retirement accounts. Always take full advantage of matching employer contributions to 401(k) plans. When you don’t maximize your 401(k) employer matching, you are not only failing to save for your future, you are also turning down free money and possibly missing out on tax savings as well.

Roth IRAs and Roth 401(k)’s are made with after tax dollars. That means that while you won’t save money for your current taxes, you’ll have the opportunity for your money to grow tax free in your Roth accounts.

Traditional IRAs are made with before tax dollars. This means that maximizing your annual Roth contributions will reduce your tax liability due with your next filing.

Contributing to Health Savings Accounts (HSAs) can also produce savings. HSA contributions are tax free and account balances roll forward from year to year. It is almost always a good idea to make maximum contributions to an HSA if one is available to you.

What about tax planning for business owners?
If you own your own business, your opportunities for tax planning will be even greater. Almost every decision you make as a business owner can have an effect on both current and future taxes. Business entity selection, filing status selection, business incentives and federal, state and even local tax credits and abatements can affect your tax liability. Even your selected method of depreciation can have a real effect on your tax.

Business owners should make a habit of sitting down with a qualified tax advisor for tax planning every year. A good advisor will know not just the law, but also your business and personal situation and plans. The more your advisor knows about your current situation and future plans, they better they can help you take advantage of opportunities for tax minimization. Even what seems like small decision can have huge effects on your tax bill, your cash flow and even the long-term value and viability of your business. Missing out on available incentives or structuring your business and transactions in a less than optimal way could cause you to miss an opportunity for tremendous savings.

What should you do now to maximize savings later?
Tax planning is a process that is unique to each tax payer. What is right for one individual or business owner may not be right for another. Your situation, opportunities and objectives will help your advisor find the best plan for you.

The most important thing you can do is schedule a time to sit down with your tax advisor. Be open and forthcoming about your current financial situation, future expectations and any and all business dealings. Understanding your current situation and your future plans will allow an advisor to develop the best strategy to minimize your tax liability and maximize your wealth. Find time to sit down with your tax advisor sooner rather than later, and remember, if you are just too busy to plan now, you can plan to pay more than necessary next spring.