4 Cycles of Yearly Tax Planning

What is Tax Planning?

During every tax year you should maximize everything you can – in every way – to legally keep as much of your money as possible. This involves doing everything you can before December 31st to estimate your personal or business income taxes, search for the right credits, find deductions for all of your expenses, and reduce the taxable income you’ve made so that you can pay less of that in tax.

What is Tax Time?

So tax time is coming again. It doesn’t need to be so scary, though. Not if you’re prepared. For most of us, the filing and paying period runs from January 1 thru April 15th, with April 15th being the “due date.” Here at Rietsch, we highly recommend a less rushed tax time. That means year-round preparation, as well as periods of preparation. We’ll explain below.

Cycle #1: Year Round:

There are some things you need to consider, no matter what time of year it is.
1) Ask your employer to adjust your paycheck where it should be regarding your withholding (your payroll person can help). If not enough tax is withheld, you’ll owe too much at tax time. If too much is withheld, you will wait unnecessarily for pay that is really yours. And, someone else – like the government – will be earning interest off of your money!
2) Maintain your records in one place – W2 forms, sales receipts, cancelled checks, local tax documents. Tax time is already stressful, so you don’t want to be running around looking for paperwork.
3) Do the “little things” that save money while you sleep: switching to a Roth 401(k), giving to charity through appreciated stocks rather than writing a check, take part in your company’s Flex Plan. There’s a myriad of ways out there that can make your tax burden less with just a little financial research.

Cycle #2: January 1st thru April 15th:

First, you want to make sure you’ve received everything you’ll need to prepare your tax documents.
Be looking for:
General, or Normal Taxable Income – W2 forms, Interest Income Statement, Dividend Income, Unemployment Compensation, and Miscellaneous Income
Retirement Income – Social Security, and any company you spent a lifetime helping to build who now pay you a monthly check of appreciation
Business Income – Income from a business (and expenses, too), Rental property income, any income from Trusts or Partnerships, and any tax deductible business-purpose driving you’ve done.
Tax Credits – Expenses for an adoption, child care providers, first-time home buyer tax credits.
Expenses/Tax Deductions – Things like medical insurance paid out, home second mortgage interest, professional dues, job-search expenses, IRA contributions. There are many of these out there.
General Information – Always have your copy of last year’s tax return, any educational expenses, dependents’ college educational expenses, your social security numbers, dependents’ information (name, birthdate, and social security number), and bank account and routing numbers.

Cycle #3: April 15 thru October 15th:

The important thing in this time period would be if you’ve filed a tax return extension (IRS Form 4868). Remember that this is an extension of time to file your tax return, rather than more time to pay your tax bill. You still need to pay at least 90% of what’s due by your tax estimate. Just remember that, while you will pay IRS penalties for not paying your tax bill on time, the bill for not filing your taxes or an extension will be much worse. Another thing, if you miss the deadline (April 15th) for filing an extension, do not send an extension late, but rather send in your tax return late, because the penalties and interest will continue to accrue as time goes by.

Cycle #4: October 15th thru December 31st:

Everyone – and we mean everyone – gets swamped by life at the end of the year! The holiday season in full swing, finishing year-end work projects, planning out-of-town travel, and maybe even extra visitors in your home. So, a good idea is not to wait until the last day, but do these simple things during this time period:

Year-end tax planning guide:

Claim your tax breaks (credits and deductions) that you are due by December 31st. Reduce your taxable income as much as possible. Things like using a Flexible Spending Account, dividend income, make contributions into your education savings account, make charitable contributions, and claim tax deductions for your small business. When you research this further, be aware that there are some things not able to be deducted from your taxes: political donations, repairs to your home, club and membership dues, and penalties for delinquent tax payments. There are many, many more.

In conclusion

Our tax and accounting firm is here in Clinton, Michigan, but we know that you can use these tips wherever you may be. But, if you need tax help, or just want to ask a professional some questions, please call us anytime at (586) 228-2530!