Newsletter – August 2015

Mid Year Tax Planning

 

This is a time of the year where tax planning may be warranted. For many taxpayers tax planning is not needed but for certain taxpayers it is a requirement. These taxpayers would include businesses, high income taxpayers, and taxpayers with different forms of income and deductions. The purpose of tax planning is to create a tax projection for the taxpayer based on their circumstances and develop a plan to minimize the amount of taxes they would have to pay. One of the best times of the year to develop a tax plan is during the middle of the year. During the summer months is an excellent time to develop a tax plan. In this newsletter we will explore mid year tax planning and what it entails.

 

Businesses

 

In most cases mid year tax planning involves a business. The reason that most tax planning involves businesses is because with businesses there are many moving parts with many tax laws that allow businesses to take advantage of. With businesses the typical tax planning process involves taking a “snap shot” of the business income and expenses for specific time period and then annualizing that income result for the entire year to determine the taxable income for the year. After taxable income is determined then the income tax can be calculated and projected. Once the income tax has been projected then a plan can be put in place to minimize the tax liability. There are many tax planning strategies that can put into place over the remaining portion of the year that will reduce taxes. Because many businesses make estimated income tax payments over the course of the year these taxpayers can then adjust their estimated tax payments based on the projected income tax. For any business that has significant income and deductions tax planning should be mandatory.

 

Individuals and High Income Taxpayers

 

Mid year tax planning may also be advantageous for individuals and high income taxpayers. The mid year tax planning process for individuals is for the most part the same format as with businesses. A “snap shot is taken of the individual’s year to date income and deductions and then annualized for the entire year to obtain projected taxable income. Once taxable income is determined then the income tax can be calculated. For most individuals who perform mid year tax planning these individual are usually high income taxpayers who have usually an assortment of earned income, retirement income, passive income, and investment income. Again there are many tax strategies are can be implemented to minimize the tax liability. After a tax projection has taken place, many taxpayers whose income is in the form of W-2 income, can then adjust their income tax withholding with their respective employers.

 

Different types of income and deductions

 

Once in a while a taxpayer may incur unusual income or deductions that happen once in a lifetime that may require tax planning. The following unusual situations may require a mid year tax plan: Death, bankruptcy, foreclosures or short sales of real estate, lawsuit proceeds, gambling winnings, severance pay outs, large capital gains or capital losses, retirement distributions, significant medical expenses, and significant charitable contributions. Now these different types of income and deductions are not all encompassing. There are many other situations that may require a tax plan. Depending on the specific situation, a income tax projection will be created and then a resulting unique tax plan will be put into place.

 

Because the tax code is so complex and because tax laws are constantly changing for many taxpayers a mid year tax plan is a necessity. Most taxpayers do not like dealing with taxes or paying them. In addition, most taxpayer’s do not like being surprised when it comes to filing their tax return as to what the outcome is going to be when their return is filed. A well tailored plan can help mitigate most taxpayers fear and dislike of dealing with taxes and paying taxes. If your situation involves one of the previous tax planning circumstances then don’t delay and create a tax plan today.