Tax planning and management: A Secret tactic

Tax planning and management is the secret of billionaires. We all wonder how corporations and rich people can manage to get away with paying little to no taxes. Who can forget the fiasco of when Donald Trump told the world he didn’t pay taxes?

It’s not illegal. It’s not even immoral. The truth is, tax planning and the efficient management of taxes is (or should be) a staple in every business owners repertoire. Especially in the beginning years of their business when most businesses fail. The first 7 years of a business are usually the hardest financially, and saving thousands in tax costs, could make or break them.

This is especially relevant when you consider that every year, billions of tax deductions and credits go unclaimed. Couple that with the fact that most people retire without having enough money to cover themselves fully. Now add, to that the desire to create generational wealth and the fact that only about 5% of businesses survive to the third generation.

So exactly what is tax planning and management?

If you’ve ever done your taxes yourself, or read up on deductions and credits, you may have kicked yourself when you realized that if you had just missed out on something. Maybe you should or should not have bought that new desk. Perhaps you should have kept the receipts when you bought those books.

Wouldn’t it have been nice if you’d had a plan before you spent that money? Maybe you would have booked that hotel and spa sooner or later to correspond with that business meeting. Maybe you would have eaten at Chili’s during a business meeting, instead of later on that night by yourself. Or perhaps you would have bought a printer to be able to write off the depreciation deduction instead of going to Kinkos or Staples.

Tax planning is a preventative measure. You sit down (or your CPA or tax attorney does) and you develop a plan. That plan involves your income, expenses, the credits and deductions you could qualify for and the individual goals you have for your taxes.

Instead of letting life come, you need to create the circumstances that will pull your plan together. This can be as simple as increasing the amount of taxes taken out of your check throughout the year to plan for a higher than normal tax bill. Or as complicated as investing in an IRA to avoid paying taxes on the dividends from a profitable stock.

Tax planning and management objectives

The objectives of tax planning are simple but many.

1. To lower your tax liability: Owing money to the IRS can be more than an inconvenience. And unfortunately, without proper tax planning, many people end up with lasting tax debt. There is almost nothing more nerve wracking and hopeless than an ever-increasing tax bill.
2. To Maximize your refunds. There are upwards of 500 deductions and quite a few credits that you may qualify for. Strategic planning might mean that instead of paying in full for something, you finance or make payments instead. Ex: You need $5,000 worth of Product/Service X for your business. A certain deduction allows you to write off only $500 every year. So instead of buying $5,000 once, you only buy $500. But you do that for 10 years. You’ve effectively written off the entire purchase, instead of only $500 worth.
3. To offset the potentially disastrous effects of certain taxes. Many companies fail to do business succession planning and end up being dismantled due to tax events they didn’t plan for. The inheritance tax and capital gains tax usually strike when a business owner dies and leaves their company to a family member.
4. And more… tax planning and management can be used for everyone from individuals to small businesses and more. The important thing is to recognize that you need it and take action.

What are the different types of tax planning?

Purposive Tax Planning:

Creating your tax plan with a specific objective in mind.

Example: Mavis wants to renovate her home to help her wheelchair bound mother. She owns a small business that she runs from her home. In order to take advantage of all the deductions available to her, Mavis sits down with her accountant.

After going through all the deductions, Mavis decides that her best course of action would be to replace her utilities with eco-friendly alternatives. She was able to qualify for the Energy Tax Credit, as well as deduct the depreciation. She installed a wheelchair ramp to qualify for the Disabled Access Tax Credit, and to repave her driveway (which she deducted).

Permissive

Creating your tax plan according to tax law. Following the legal side of taxes and planning your expenses, and income with the tax code in mind will always help you to stay one step ahead of the IRS. This is usually achieved by hiring a tax attorney. They have a specialized knowledge of tax code and laws and can advise you expertly.

As an added note, all tax planning should be permissive. You don’t want to wind up like Wesley Snipes, or Ronald Isley. Jail time and tax evasion charges are not a good look and should be avoided at all times.

Short Range Tax Planning

Tax planning done at the end of the year to maximize tax benefits and minimize tax liability. Most common (most people only think about taxes when it’s time to file)

It’s January again, and W-2’s and 1099’s are coming in. Sadly, most people do no planning at all. And if they do planning, it is at the 11th hour, right before they file their taxes. This is the point where divorced co-parents decide who is going to claim their child in order to get that one tax credit. It’s better than nothing, but not by much.

Long Range Tax Planning

Tax plan is created at the beginning of the year to follow. Benefits are seen when filing season arrives. This of course, is much better than short range planning.

And why shouldn’t it be? Planning your year in advance can benefit you in many ways. The same way a 5 year plan can guide your life towards desired results, a Long Range Tax plan can change the outcome of filing season considerably.

How do you do tax planning and management?

Very carefully. Obviously, you can hire a qualified professional. A CPA or a tax lawyer, even a tax resolution specialist can help you with tax planning. But keep in mind what their individual specialties are. A CPA is money minded and may be able to help you more with the financial side of finding tax credits and deductions.

A tax lawyer can assist you with creating your tax plan while staying safely within the confines of the law. A tax resolution specialist is more geared towards avoiding and mitigating trouble…especially if you are already behind in your taxes.

Depending on your finances and time constraints, hiring a professional might be a safe bet. But not everyone has the money to hire help. Don’t be discouraged, you can still create and act upon a well executed tax plan.

Gather the records

In order to create and implement a good tax plan, you need to know what you are working with. So start off with compiling and organizing all the records you have. That includes w-2’s, deeds, receipts, bills, stock portfolios, etc. You need to basically have your entire financial life on hand. This is important. Because, in order to properly assess your tax situation, you will need to sift through these records multiple times.

Don’t forget your medical expenses, utilities, and entertainment. It’s better to have too much information than not enough.

Learn some tax law

I’ve been studying tax law for a while now and the first and most important resource I bought was the U.S. Master Tax Guide. I have found it to be the definitive source on tax code and I’m constantly checking it.

You’ve got to understand exclusions and exemptions, deductions and credits, income and expenses. There is no way that you can read this book and not know everything there is to know about taxes. Of course, you may never read it all, since it’s about a thousand pages.

In order to properly plan your taxes, you’ve got to learn about YOU first. Your tax bracket and tax rate. You need to know what types of state legislation will affect your federal taxes and vice versa

Learn Credits

Tax credits are a bonus. Basically, the government has incentives (tax credits) that you can subtract from the taxes you owe. If you are getting a refund, tax credits mean a bigger refund. There are credits for being elder and disabled, going to school, having a dependent, and many more. You can even claim a tax credit for money withheld in taxes on your checks.

Once you go through the different credits that are out there, you need to create a checklist of what credits you qualify for and which credits you can plan to qualify for.

Study Deductions

Tax deductions are dollar amounts that are taken out of your taxable income. This directly lowers the amount of tax liability you have. Which affects how much money you would owe. Deductions, credits, and exemptions are all tax incentives that the rich use to safeguard their wealth.

There is nothing more satisfying than having a long list of deductions that you can qualify for and claim. For my own personal use, I usually spend a few hours going through the 475 tax deductions for businesses and self-employed individuals. I do this at the beginning of each tax year.

Usually, I’ll go through what I know I qualify for first, write those down. Then I go back through for what I might qualify for. Then, my third trip through is for deductions that I could possibly qualify for if I took certain actions. Let me be clear, I don’t incur expenses for the sole purposes of claiming deductions. But with strategic tax planning, I am able to schedule the expenses I was going to have anyway so that I am benefited more.

Tax Planning for Retirement

Planning for retirement is one of the most important ways to utilize tax planning. You don’t want to turn 65, finally be able to leave your career and end up being forced to work an odd job out of necessity instead of boredom. There are several ways you can do this starting today.

Strategic HSA accounts

An HSA is a health savings account that you pay into that is used to pay medical expenses. If used to pay medical expenses, anything you take out of it is tax free.

AFTER you turn 65 however, you can use the HSA for non-medical expenditures. You will have to pay income tax, but you won’t have the 20% penalty.

Purchase an annuity

If you purchase an annuity with money that you did not take out of your retirement account, the payments will be partially tax free. You will be taxed on the part that is gained and not the part that you paid.

With proper tax planning, you can work out when the right time to start taking Social Security Payments, and even plan out exactly when is the best time to retire.

Be mindful

Whether planning for a specific purpose, for retirement, or for wealth, you can’t go wrong. What you lose in a few hours of boredom at the beginning of the year, you can gain in thousands of dollars of deductions and credits. Start building wealth strategically, with a plan in mind to guide your actions and watch your tax season become more enjoyable. Remember! Tax planning and management is the secret success of billionaires a, why not make it work for you too?