People who do their taxes by themselves are usually so stressed and tired after the tax season passes that they forget all about tax planning. For those who have never heard the term before, don’t worry most taxpayers don’t necessarily know what Tax preparation is all about. To explain tax planning simply, it is a way of arranging your financial affairs that will result in postponing or completely avoiding paying excessive taxes during each tax season.
How Does Financial Planning Come Into Play
When you hire an expert to help you with your financial planning, they can give you tax planning strategies that can help you save significant amounts of money every year. Understanding the latest American Taxpayer Relief Act all by yourself will take countless of dedicated late nights deciphering legal jargon that will only confuse your understanding of taxes further.
The main goal of a financial planner when they are taking tax preparation seriously is to lower the income tax return rates on their client’s investment income. Since the latest tax laws have been passed and implemented, many people are hesitant to invest more because they end up paying more taxes which takes a hit on their finances. Without proper financial and tax planning, all of the revenue from your investments will be eaten away by your yearly taxes.
Examples Of Tax And Financial Strategies
The moment you consult with a financial expert and mention that you are interested in the benefits of tax planning they will study your finances to come up with the best strategies. These are some examples that are commonly presented to clients such as yourself:
Harvesting Gains – This is a tax planning strategy that is employed over a multi-year period. The main goal is to identify the which part of the year capital gains are strongest and weakest because they are taxed the most. This is not a good strategy for everyone but it works best for companies that have suffered a significant loss in a year due to low income.
Asset Placement – During the financial and tax planning consultation the financial and wealth management expert will look into the issues of asset placement. There are two important concerns: First, deciding if the fixed income that is considered highly taxable belongs in the retirement account, as part of the Roth IRAs, or will it remain as a regular account. Second, they will help you determine if the higher growth equities being taxed at a low rate should be classified outside of the retirement account.
One Strategy Does Not Fit All
There are several other strategies that your financial advisor can provide after they have taken a closer look at your financial situation. However, the bottom line remains, there is no single tax planning strategy that works for everyone. Each financial situation is unique and will require further assessment. Consult with a trusted financial planner and tax planning expert to see all of your available options.
In the end, tax planning and financial planning should always go hand and hand because you stand to lose a lot of your income through yearly taxes if you don’t take tax preparation seriously.
Tax preparationcan help limit the tax drag on your finances. Our experts at Phillip James Financial can show you the way. Contact us for more info.