Tax preparing isn’t necessarily tax planning

In my financial planning practice I have the opportunity to look at many people’s tax returns. Most of these people are very happy with their tax preparers, but many are missing tax savings opportunities because there is no tax planning.
Typically in February or March we take our tax information to our “tax guy” who asks a few questions to make sure we have given him everything, and then a week or so later our tax return is done. We’re glad its over and we don’t have to see the “tax guy” again until next year.
This is a mistake. We should be meeting with a professional every October/November to determine what, if anything, could/should be done this year to affect our next tax return. That professional could be a CPA or a financial advisor.
There are changes you can make in your portfolio, even as late as Dec. 31, that can make your visit to the “tax guy” more rewarding. You may have an opportunity to take advantage of existing tax rules, that can only be done during the calendar year. Once the year has ended the opportunity is lost.
We see people each year who are in a position to move money from their IRA to a Roth IRA with little or no tax consequences. We work with people to change some of their portfolio positions to reduce their taxes. There can be opportunities to generate tax favorable income or to defer taxes or to pay taxes now because it’s a year you’ll be in a low marginal bracket.
A common mistake people make is not understanding “marginal tax” rates. Your marginal rate is the amount of tax you would pay on the last dollar of income you earn. Why is this important?
Your marginal rate should be considered when deciding to put money into an IRA vs. a Roth IRA. If you’re older, your marginal rate should be considered to decide whether to take money out of your IRA (to spend or for Roth conversions). For those looking towards estate planning, your marginal rate and your heir’s marginal rate should be considered when determining estate transfer options.
There is much value to tax planning. I get frustrated when I see tax returns of people who have missed out on tax opportunities because no one did any planning with them.
Each year in October or November most people should sit down, do a review of their year and have a planning session with their CPA or financial advisor. As a financial advisor it is my responsibility to help my clients achieve their goals and avoid potential problems, and tax planning is an important element of this responsibility.


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