May 2019 Newsletter

Is Tax Planning for You?

For the majority of taxpayers tax planning is not a requirement. Most taxpayers have basic tax situations in which they are an employee and have a W-2, some investment income, and maybe a few deductions. In those cases tax planning is probably not warranted. However, there are some taxpayers that do need tax planning. With these taxpayers it is not an option but should be a requirement that they do some planning at some point during the year. Tax planning in its most simplistic sense is summarizing a taxpayer’s income and deductions, projecting the income tax, and then developing a plan to decrease the amount of taxes that the taxpayer will pay. As we head into the middle part of the year this is the time where tax planning can really benefit certain taxpayers. In this newsletter I will discuss who these taxpayers are that need planning and what type of planning should they receive.

Taxpayers that need tax planning

  1. Self employed. Most taxpayers that own a business (self employed) should have some form of tax planning. The primary reason for this is that the net income from your business will determine how much tax you will pay. If a business owner is not keeping track of the business income and expenses over the course of the year it will be extremely difficult if not impossible to determine the amount of tax that you will owe. So the first step with business owners is to have an accounting system in place to track and summarize the income and expenses and to stay current throughout the entire year. Once the business owner has the accounting system up and running, then the owner with the help of the accountant, can determine what the projected tax might be for that given year. The second step would be after determining what the tax is going to be is to formulate a tax plan to help minimize those taxes. The third step would be to calculate any estimated tax payments or withholding for the business owner so there would be enough taxes paid in or set aside over the course of the year so the business owner is not hit with a large tax bill when the tax return is prepared. Without performing these steps a business owner will be lost and unable to properly account for the taxes that will be due. In addition, the lack of tax planning will be costly to the business owner as there could opportunities lost for saving taxes as well penalties could be incurred for not paying enough taxes in over the course of the year. With the new 20% Qualified Income Business Deduction it has made tax planning even more of a necessity. Because of the significant tax benefits that can be derived from this deduction and because of its complexity it has made tax planning a must for small businesses.
  2. Investors. There some taxpayers whose only source of income is investment income. This type of income would include interest, dividends, sales of securities, and passive type income such as rents. Depending on their situation these types of taxpayers may also need tax planning. If an investor has significant investment income and especially if that income is diverse there is a strong probability that this type of taxpayer will need some form of tax planning. When tax planning for investors the first step is to determine the type and amount of investment income that the investor has. The second step would be to project the income tax based on this income. The last step would be to create a tax plan to mitigate the amount taxes that the investor would pay.
  3. Retirees. Retired taxpayers may also need tax planning. If a retiree has retirement income that is mostly fixed in nature i.e. social security, pensions, and retirement distributions then in most cases tax planning would probably not be warranted. However, if a retiree has different forms of retirement income i.e. investment income, annuities, rents, social security and if that income is significant then some form of tax planning should be required.