- Posted by Admin
- On May 4, 2016
- 0 Comments
Taxes are a big expense for many peninsula families and though we must pay, there are a number of strategies you can use to lower your tax bill. In order to do that, you should understand the basics of taxes, techniques for lowering your bill, how to plan for taxes and how to find a competent tax professional.
It’s a common misconception that more income means higher taxes for all of your income. My father used to fear his bonus thinking it would push him into the next tax bracket. It wasn’t until later that I was able to explain to him that the first dollar we make is taxed at a different rate than the last. For example: a married couple that earned two-hundred thousand dollars in 2015 pays taxes at a rate of 10% on the first $18,450 of income, 15% on the next portion of income from $18,451-$74,900 and so on.
Another common misconception is that “tax season” is the time to think about taxes. This isn’t true for many here in Silicon Valley. Families should have a tax plan that addresses their tax needs year-round, particularly when they have stock options, buy or sell a home, are self-employed or have a significant change in income. Anytime you experience an important financial event, consider doing a mid-year tax estimate to see what your tax liability is shaping up to be. No one likes paying taxes, but worse yet is getting hit with an unexpected tax bill. Planning the tax year is key for many families.
Before we move on, here are a few more basics:
- You are entitled to apply for a six-month filing extension. However, any taxes owed are still due by April 15th.
- 2015 IRA contributions can generally be made until the time at which your return is due and before filing.
- Underpayment penalties, which can result from self-employment, unexpected income, the sale of property and so on, can be avoided by making quarterly estimated tax payments.
There are a number of methods you and your tax pro can explore to lower your tax bill. Anyone can Google tax tips and come up with dozens, but let’s discuss three you should know about. First, tax deductions can be recorded in more than one place on your tax return. A deduction that saves you money on one part of your return may not if moved to another and vice versa. For example, an expense might not save you money if taken as a personal deduction, but might be fully deductible if taken as a business expense. That can be a good reason a stay-at-home spouse to consider independent consulting or a small business. Second, high income earners should consider tax efficient investments. The investment world is huge, but families in top tax brackets should consider tax efficient investments such as municipal bonds which can be income tax free. There are also tax-advantaged education accounts such as the Coverdell and 529 Education Savings Account that can be a great way to save for a child’s future. Third, if you happen upon a low income year due to a new born or time off, talk with a tax pro about possibly rolling pre-tax IRA money into a Roth IRA, tax free. The devil is in the details, but if done correctly, you may be able to avoid paying taxes on that money, ever!
Tax planning is usually best done with a tax professional. The process often starts by finding a tax professional to work with which we’ll discuss later on. Once you do, planning should begin by examining the particulars of your specific tax situation. This often involves doing a mid-year tax estimate or mock tax returns, determining the optimal tax structure for a business (which can provide huge tax savings) and examining stock benefits and options (of which there are many, each with their own tax treatment).
A well structured plan usually means that you have a good sense of your tax liability throughout the year, know how to use the tax code to your advantage and that you have integrated tax considerations into other elements of your financial picture. Planning may result in the decision to setup a side-business for a non-working spouse, which can be great write-offs. It can mean setting up a tax qualified education account for your child in order to build their college fund. Or, it could mean saving big bucks on the sale of a home. Work with a pro to get started on your own tax plan.
Finding a Tax Pro
There are a lot of folks out there offering tax services with various designations: CPA, EA and CRTP. You should know the difference:
- The CPA is the most well know designation although many CPAs are not tax specialists.
- The EA or Enrolled Agent designation is bestowed upon the recipient by the Internal Revenue Service after passing several examinations. This person is a tax specialist and does not practice in other fields like a CPA might.
- The CRTP is the most rudimentary of tax designations although experience can be a great equalizer.
Most families seeking a tax pro should look for the EA or CPA designation. When interviewing tax professionals, hopefully you’ll find them asking questions, not just answering yours. That said, you might ask if they can help with both tax planning and tax preparation. And, when asking about preparation, ask if they’ll walk you through your completed returns and when they intend to get started. Many want you to gather all your documents first, but why wait? Starting as soon as they receive your first tax document and creating a working draft allows you to get an idea about what your tax bill looks like. Remember: no tax surprises! Lastly, ask an EA or CPA if audit representation is available. It’s preferable to work with the person who prepared your taxes in case of an audit. And, if you receive an audit notice, we recommend you seek the help of a tax professional right away.
If you are planning properly, tax strategy discussions can help a family discover new avenues to happiness and prosperity. As you go through the process, you might find that a little consulting or a side-business makes sense for you. You may discover new found resolve to save for your child’s education and future. You might even find excitement in potentially saving hundreds and even thousands of dollars just by giving your year-round tax plan a little thought. Plan your strategy, take advantage of the tax code and work with a professional to understand how taxes apply to your specific situation.
Looking for more guidance in your tax planning? Dragon Financial Group is happy to help. Contact us or schedule an appointment here.
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