8 minute read
Tax preparation can be a pain for most people, which is why the thought of tax planning is even scarier. While tax prep is about accurately filing tax returns, tax planning goes above and beyond that to seek out strategies to legally reduce the amount of taxes owed. Many people wait to do year end tax planning in December, but the best time to get started with a tax plan is earlier in the year.
Why should people begin tax planning long before the end of the year? The reason is because many times strategies take some time to implement. For example, you may need to change the legal entity of your business to reduce your tax liability. Waiting until the very end of the year will likely mean missed opportunity. However, better late than never!
The reason why tax planning is important is because so many individuals and businesses are overpaying taxes. For example, a woman named Sally owed $23,392 in taxes but she paid $29,382. Her overpayment was a result of incorrectly filing or missing 6 items which properly filed would have resulted in $5,990 savings.
Additionally, Sally can implement 4 strategies for an additional $7,239 of tax savings. Sally has gone from paying $29,382 to $16,153 in taxes which is a $13,229 savings (45%).
Depending on the person or business, many tax plans can add up to a large amount of savings. So, with the benefits so large, why do so many not do year end tax planning?
Tax planning is harder than it sounds. First, you have to find strategies that could apply. Next, you actually have to apply those tax strategies. It takes time digging into your situation and running different scenarios to find the best case for yourself and your business. Getting your tax bill as low as it can go sounds nice, but is it worth the hassle? Most people don’t want to even prepare their own taxes, so the amount of work that goes into tax planning immediately drives most people away.
That said, the savings can be so significant that if most people realized how much savings they could have, they’d likely spend the time and effort necessary to get those savings—or pay a professional tax planner to do it for them. With tax planning software available, many tax firms can now produce tax plans in record time.
Think about it like this: would you pay your CPA $10,000 for a tax plan if they told you they could lower your tax bill by $30,000? Of course you would. No matter the cost of a tax plan, if you’re saving more than you’re spending, it’s valuable. The main problem with waiting until the end of the year is that many of the strategies your CPA will suggest could be too late to implement before the calendar turns.
There’s an old saying that goes, “The best time to plant a tree was 30 years ago. The next best time is today.” The same can be said with tax planning. Ideally, the best time to tax plan is earlier in the year. The next best time is today, even if it’s late December.
Even if you don’t have time to implement everything before January 1, you can begin to change things for the year to come and be set up nicely for the following year.
This is why any month of the year is fine to begin tax planning. As tax preparation season comes each spring, many people already have taxes at the top of their minds, so naturally tax planning can be popular leading up to April 15. Many accounting firms like to concentrate on tax planning after tax season ends, when they have more time to focus on it. For these firms, the summer months may be the best time to offer tax planning services. Still other firms offer tax planning year-round, and many firms are putting an increasing focus on tax planning versus tax preparation.
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There are several ways you can begin to pursue a tax plan. Perhaps the easiest way is to find a firm that offers the service. If you want to tax plan by yourself, you should realize first that there are certain basic strategies you should be taking advantage of, such as retirement planning.
If you don’t have retirement accounts, you should become aware of the tax savings possibilities of contributing to a retirement account and maximize your annual contributions. You should also consider that the retirement plan you have is in fact the most appropriate one for your situation, whether it’s a 401(k), IRA, SEP, etc.
You also should make sure you are maximizing investment expenses and minimizing alternative minimum tax and investment income tax. If you invest heavily in securities, you can take advantage of tax loss harvesting and 83(b) elections.
If you have a business, look into these for starters:
If you want to delve deeper and make sure you maximize all you can, it might be more profitable to have a professional tax planner go ahead and do your tax plan for you. With software such as Corvee, many firms can help maximize savings with auto calculations of over 60 strategies.
If you’re a tax or accounting professional and would like to help individuals with tax plans, it makes sense to use professional tax planning software to save time and energy. Keep in mind that tax planning goes beyond just tax projections. You actively find savings rather than predict what a client will owe. Implementation can and should be an additional fee. For more on how firms are tax planning in 2021, read some of our case studies here or about how we recommend you price and package services in your firm here.
See how Corvee allows your firm to break free of the tax prep cycle and begin making the profits you deserve.
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