Global View Investment Blog

Tax Planning vs. Tax Preparation

It’s Time to Do Your Taxes!

What?  It’s not April 15th, is it?

Well, you’ve got me there.  But, it is the time to lower your 2014 tax bill if you were unhappy with what you paid last year.  What I’m talking about is tax planning.  And this is a great time of year to do that.

Many of you were very unhappy with your tax bills last year, and with good reason…or rather, reasons.

New taxes for last year included:

  • The increase in capital gains tax from 15 to 20 percent
  • The 3.8 percent surtax on investment income due to the Affordable Care Act (a surtax is an additional tax on something that has already been taxed!)
  • An increase in the top tax bracket from 35% to 39.6%
  • New limits on itemized deductions including mortgage interest and charitable giving.

We are moving very quickly into an environment of much higher taxes.  The average US household pays over $30,000 annually in income taxes alone.  Many of our clients pay multiples of this figure.  This ongoing and ever-increasing burden is insidious and has the ability to not only derail our economy but also your personal financial plan.

So, what’s the answer?  Tax planning is the answer!

The bad news is that the tax code is more complex than ever, and rates are rising.  The good news is that clients can benefit more than ever from tax planning.

There are many, varied definitions of this subject, but I will just share mine:

Tax planning is estimating your future tax liability, then devising a plan to reduce this to the legal minimum.

Tax preparation and tax planning are related but separate endeavors, and there is a season for each.  When we wait until the end of the year to address our tax burden, we have waited too long. Not only have our business and financial activities been concluded and finalized, but our tax professional will be working long hours preparing returns.  Now is the time when you and your CPA can impact these numbers.  Year-end is simply too late.   Tax planning can have a huge impact on the value of your investments over time, helping you reach your goals sooner, and can allow you more disposable income.

Own a business?  How about more money for working capital or capital expenditures.

Tax planning forces us to consider the timing and characteristics of our various transactions, be they revenues recognized or expenses incurred, and how best to marry these to utilize the tax code to our advantage.  Seeking tax advice before you make major transactions, rather than afterwards will allow you to make tax efficient decisions.

As in all things, we have to be good at the basics before we move on to the advanced.  Over lunch I was discussing this issue with our friend Lisa Nason, managing partner of Nason Accounting.

She confessed to me that often it seems that clients have not made the most basic moves to lower taxes.  When someone complains about their taxes, professionals start by asking simple questions, such as “did you maximize your retirement contributions this year?”, or “have you increased your estimated tax payments or withholding based on your last year’s tax liability?”  Lisa lamented that, “I would love to tell you I hear lots of “yes” answers [to these questions], but I don’t.”  Just as we see in financial planning, it is a simple but well executed plan that is needed.

For high income clients, the tax-efficiency of your portfolio is now much more important with the increased capital gains tax and 3.8 surtax.  These two together can push you into a higher tax bracket.

As is the case in financial planning, the goal is not to change our behavior and be a slave to the plan, but to utilize our plan so we can more efficiently reach our goals.  The more money a client makes, the more important it is for them to consider tax efficiency in all their financial and business planning.  For many of our clients, taxes are their single biggest ongoing expense in life.

So, when you get back to normalcy after the strain of getting your kids back in school, be sure to call your tax professional to schedule time with them.  Don’t have one? Call us and we can help you find the right professionals for your situation. You’ll be glad that you were proactive next Spring.

Are you on track for the future you want?

Schedule a free, no-strings-attached portfolio review today.

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