Tax law is constantly changing, and it is almost impossible to keep up with all of it, but thankfully, here at Molen & Associates, we are dedicated to help our clients save on taxes. With each new president or change in congress members they make promises that they will “simplify” the tax code or that they are “cutting taxes for our benefit.” Unfortunately, the changes made sometimes do the opposite and it becomes more and more complicated with each of the new tax laws. We make it our business to know what these changes are, and how we can aggressively and lawfully get the most benefit out of these laws for YOU!
Remember “The Game of Life”? It’s the game where you have a car with blue and pink people in it, you spin a wheel, and you ride along the board picking up cards that determine what your life is like. Unfortunately, too many people think that is the way real life is. They think whatever cards are dealt to them they have to make it work and keep plugging along. They hope that the next card dealt is their ticket to greener pastures. Here is the good news: That is complete garbage! You choose your own future! Unlike Hasbro’s “The Game of Life”, you can make your own choices and make the best of any situation. It will not be a cake walk. However, once you have a plan and put in the hard work up front, you can set yourself up for success.
What are the four types of tax planning?
- Federal Income – Individual or family tax planning focuses on knowing what your household makes (income), how you file your return and which tax breaks will provide the most relief.
- Retirement – Managing your taxes before and during retirement is key not only to limiting your tax liability once you’ve stopped working, but ensuring you have maximum control over your income and tax situation post-career and beyond.
- Estate – The IRS levies an estate tax on estates that exceed a certain assessed value. Because this value is relatively large ($11.4 million in 2019), most estates aren’t subject to federal estate tax and won’t need to worry about government taking a sizable chunk from inherited assets.
- Small Business – If you’re a business owner, self-employed or both, you face a unique set of challenges when it comes to paying federal taxes, making small business tax planning a critical, if not essential part of your overall business strategy.
What is tax planning and its importance?
Tax planning is when you use all elements of a financial plan to ensure tax efficiency. You can use many different tools to reduce your tax liability. Reducing your tax liability now means more tax savings in your pocket. If you want to know more about how you can do this you can read this article https://molentax.com/grow-your-income/ in which I have outlined other ways you can put money in your pocket.
How do I create a tax plan?
The easiest way to create a tax plan is to set up an appointment with one of our tax advisors. We can help direct you in the best direction for you based on your specific circumstances. It’s important to realize that not everyone’s tax plan will be the same. We will be able to analyze your situation and create the best plan for you.
If you already have a tax advisor or prefer to do them on your own, then the next best thing is to:
- Organize all your financials.
- Understand tax deduction requirements.
- Evaluate the tax credits offered.
- Use retirement and/or other types of funds to maximize tax breaks.
How do I start tax planning?
You can start tax planning by reducing your overall taxable income, increasing your number of tax deductions throughout the year, and taking advantage of certain tax credits. Don’t rely solely on yourself or a friend to know all of the best tips and tricks. Even if you or your friend are a CPA or have done taxes in the past. It’s hard to keep up with all of the new tax laws and loopholes that are available. Paying a professional to take a second look at it and give you some tax planning tips could save you thousands!
Tax Planning Strategies
The best way to use the new tax laws to your advantage is to familiarize yourself with and obtain a basic understanding of the available tax credits and deductions. If you don’t know what they are, or you are only aware of some of them you may spend more time and money on getting a “tax break” than it’s worth. I always tell my clients, “I’m not going to advise you to spend $1,000 to save $100. That’s bad advice!” It’s the same concept as using a coupon that saves you 10% on something you don’t need. As simple as it may seem, you would be surprised how many people will spend more money on things they think they need (but really just want) to save a little. Analyze your needs and make smart decisions based on those needs using strategies that save you more money in the long run.
Tax Planning Examples
One tax planning example is to invest your savings into a retirement account such as a 401k, Traditional IRA, or Roth IRA. Depending on what tax bracket you are currently in and which tax bracket you expect to be in in the future will determine which account you want to use.
Someone who is currently in a low tax bracket may not be paying hardly any tax and should be able to afford to invest into a Roth IRA. Doing this will mean they pay the taxes now (at a lower tax rate) and not when they take their money out in retirement (potentially at a higher tax rate). The other advantage of a Roth IRA is that after you have had the money in the account for at least five years you can withdraw funds without penalty. Additionally, all earnings in the fund will also be drawn out tax free.
Advantages of Tax Planning
There’s a reason for both why the rich are rich and why they stay rich. They use the services of people who know how to make their money work for them and who know how to manipulate the tax law to their favor. The advantages of tax planning are you will get ahead in your life and you’ll be able to get out of the rat race that most people find themselves in. If you want to know if you are ready for retirement yet, take a look at these statistics from https://www.cnbc.com/2019/06/26/how-much-americans-have-saved-for-retirement.html:
- 84% of Americans have less than $200,000 saved by the time they retire, and 22% Americans have less than $5,000 saved for retirement. Of the Baby Boomer generation, 17% have less than $5,000 in retirement.
- [That means about a fifth of retirees today are relying mostly on social security!]
- Many Americans are aware of their lack of savings, yet few are doing anything about it. On average, survey respondents say there’s a 45% chance they’ll outlive their savings, yet 41% haven’t taken any actions to address the issue.
Don’t let this happen to you!
Business Tax Planning Strategies: More ways to save on taxes
- Change your W-2 federal withholding by refilling out your W-4 (https://molentax.com/the-new-2020-tax-form/)
- Fund your FSA and HSA
- Donate to a charity organization
- Keep track of all your medical expenses
- Time your deductions in the right year
- Sell your bad stock picks
- Put money into a 401k
- Contribute to an IRA (https://molentax.com/to-roth-or-not-to-roth-that-is-the-question/)
- Save for your kid’s college fund
How can I reduce my taxable income?
- Reduce Your Tax Rate
- Take Advantage of Your Filing Status
- Earn Tax-Free Income
- Take Advantage of Tax Credits
- Maximize Your Tax Deductions
- Shift Income to Others
What are the three basic strategies to use in planning for taxes?
- Understand your tax bracket
- Know the difference between tax deductions and tax credits
- “Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability… Tax deductions, on the other hand, reduce how much of your income is subject to taxes. Deductions lower your taxable income by the percentage of your highest federal income tax bracket.”
- See if you should itemize or take the standard deduction
- “Taxpayers have two deduction options: a standard deduction or itemized deductions. While the standard deduction is the government’s built-in subtraction that you can take while preparing your taxes, itemizing is composed of individual deductions that, together, can help lower the amount of taxable income you pay.”
Who should do tax planning?
Everyone should do tax planning, and everyone can. Only those who truly want to save money and are willing to take smart risks will be able to increase the effectiveness of their tax plan.