The Advisor Advantage Part 2 - Maximizing Returns: A Year-Round Guide to Tax Planning
Tax planning is a critical piece of the financial management puzzle, but unfortunately, it often gets overlooked until January. At that point, it’s a frenzy of papers and documents racing to get everything in on time (and correct).
From January 1 to April 15, individual taxpayers work on preparing, filing, and paying their federal income taxes to the Internal Revenue Service (IRS). But to ensure a smooth and successful tax season, it’s critical to implement year-round tax planning strategies and goals.
Let’s delve into the world of tax planning and how working with a team of tax professionals can help ensure you maximize returns.
When Professional Help Matters
A tax professional can help you navigate your tax report beyond simple W2 wages. But who qualifies as a tax professional? Anyone with an IRS Preparer Tax Identification Number is legally authorized to prepare federal tax returns. Still, two main types of tax professionals exist: a Certified Public Accountant (CPA) and a licensed tax preparer.
Certified Public Accountant (CPA)
A CPA is a licensed professional with advanced education and training in various areas of accounting and business. CPAs prepare tax returns, create budget reports, and conduct audits for their clients, among many other duties. On the other hand, a licensed tax preparer isn’t required to have such an advanced education, but they do have to complete a formal exam.
A CPA is considered the ‘gold star’ of the accounting industry, and because of their advanced knowledge, CPAs are often a top choice for taxpayers. A CPA can help you:
Understand how rental income or side hustles can impact your tax report
Save time and money by uncovering deductions or tax credits you may have missed
Relieve the burden of tax season knowing your money is in safe hands
Above all, hiring a tax professional, like a CPA, can help decrease your risk of being audited.
Licensed Tax Preparer
A licensed tax preparer is a professional authorized to prepare and file tax returns for individuals or businesses. While they don’t have the same training and education as a CPA, they are knowledgeable about tax laws and regulations.
Like CPAs, licensed tax preparers can play a crucial role in tax preparation by:
Identifying potential deductions and credits to maximize savings
Ensuring compliance with tax laws and regulations
Helping clients navigate complex tax situations such as self-employment income or investment gains/losses
Hiring a licensed tax preparer can provide peace of mind and valuable assistance during tax season.
Bonus Professional: Enrolled Agent (EA)
You may not have heard of this tax professional before, so we wanted to highlight them here.
Enrolled Agents (EAs) can help individuals file tax returns, but they also have a unique skill set. The IRS authorizes EAs to represent taxpayers in various matters, such as audits, appeals, and collections. Unlike CPAs and Licensed Tax Preparers, EAs specialize in tax-related issues.
They can assist with:
Complex tax situations, like estate planning or international taxes
Ensuring up-to-date guidance regarding ever-changing tax laws and regulations to ensure compliance
Providing advice on strategies to minimize tax liabilities
EAs are highly skilled in tax matters and can be a valuable resource for individuals and businesses seeking comprehensive tax assistance or representation.
Navigating the complexities of tax reporting goes beyond simple W2 wages, and having qualified tax professionals by your side can make a significant difference.
Understanding Uncle Sam's Game
The phrase “knowledge is power” especially rings true in regards to tax planning. Here are some key dates you need to know for filing your taxes this season:
January 29: You can begin filing your tax return
April 15: Deadline to file federal tax returns or file a tax extension
April 17: Deadline for taxpayers living in Maine or Massachusetts
October 15: Due date for taxpayers that filed for an extension
Accuracy is vital when it comes to filing your taxes. Certain red flags that the IRS will pay special attention to include failing to report all taxable income, taking higher-than-average deductions, high-income earners, large charitable deductions, and more. By working with a professional, your tax returns will likely check all the IRS boxes, so you don’t have to worry about being audited.
When to Start Tax Planning
The best time to start tax planning is yesterday.
Contrary to popular belief, tax planning is a year-round activity. It’s time to break the January tradition and start wearing your tax-planning lenses 365 days a year.
Your first step should be to find a trusted tax professional before the busy season. They can help you identify opportunities specific to your financial situation, understand tax laws and regulations, and ensure your finances can help you achieve your goals.
Tax planning year-round doesn’t mean you must think about taxes 24 hours a day, seven days a week. Most importantly, you are knowledgeable about your financial decisions and have implemented a proactive approach to maximize returns.
4 Tax Strategies to Keep More of What You Earn
A tax professional has a plethora of tax-strategy knowledge so you can keep more of your hard-earned money. There are several tax strategies you can implement to reduce your taxable income and optimize your tax bill, including:
Optimizing Asset Location: High-income earners and savvy investors will want to implement a tax-efficient investment approach. Tax-efficient investing involves strategically choosing your investments to minimize your tax burden. Exchange-traded and stock funds tend to be more tax-efficient than other investments because they trigger fewer capital gains. Municipal bonds and treasury bonds are also tax-efficient options.
Maximizing Retirement Plan Contributions: One of the easiest ways to reduce your taxable income is to contribute as much as possible to your retirement savings. Because contributions to a 401k or 403b are made pretax, they will reduce the amount of income subject to taxation. IRA contributions are also tax-efficient. With contributions made in after-tax dollars, earnings in an IRA grow tax-free.
Harnessing the Benefits of Health Savings Account (HSA) Contributions: HSA contributions are tax-free when made through payroll deductions and are not subject to Social Security or Medicare taxes. HSA contributions also reduce your taxable income, and withdrawals used for medical expenses are tax-free.
The Power of Roth Conversions: A Roth IRA conversion is when you roll some or all of the funds from your other retirement accounts into a Roth IRA. This can be a great option if you expect to have a high income during retirement and want to avoid a higher tax bill. However, a Roth conversion can have significant tax consequences if done incorrectly, so consult with a tax professional before committing.
Take The First Step To Maximize Your Returns
Proactive tax planning is critical to reducing your tax liabilities in April, but it can be intimidating to do it all on your own. Engaging with a tax professional throughout the year can not only help maximize returns and minimize tax liability but also relieve you of the stress of tax planning.
Contact our team at North Ridge Advisors to learn more about our tax-planning processes and how we can help optimize your tax returns. Schedule some time here.
Always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any rates of return are historical or hypothetical in nature and are not a guarantee of future returns, which may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions and security positions, when sold, may be worth less or more than their original cost.