Tax Planning Vs Tax Preparation
As soon as March rolls around, many of us get ready to welcome the Spring season but many worry about the Tax season. I am sure you are among millions of people trying to get your tax return filled and filed away by Apr 15. Many of you might use your good Internet skills and take advantage of on-line tools like Turbo Tax or TaxAct to file taxes. Others still do not believe the on-line tools does good job in getting you big tax refund and still depend on CPA's and tax preparers for tax help.
Either way, you will only get what you can get and you can not change anything now at this point to get more tax refunds than eligible. Some do not understand, it is too late to think about getting more tax deductions unless you planned in advance. You can only reduce taxes so much by either by taking discounts or using credits. That's where Tax planning comes into play a key role.
Tax planning is many times confused with tax preparation, with only thought given to planning when preparing their annual tax return. However, little can be done to actually reduce your tax bill at that point. If your aim is to reduce taxes, you need to be aware of tax planning opportunities throughout the year.
Take time in the early part of year, may be during tax preparation process, to assess your tax situation, and look for ways to lower your tax bill. Consider a list of items, such as what kinds of debt you owe, which investments you own and need to dispose, how you are saving for retirement and kids education expenses and what tax-deductible expenses you incur. Also deciding whether you want to file separately or jointly, timing the sale of your capital assets, deciding on period of withdrawal of retirement funds, the timing and amounts of giving gifts and when to pay expenses are some examples of tax planning.
By thinking about tax consequences during the year on every big financial moves will prevent you from finding out later that there was a better way to handle every transaction.
Here are few examples of tax planning which may help you either to get better refunds or avoid shelling out on taxes during the filing time.
1. If you are an employee, you can avoid paying at the end of the year by increasing your tax withholding. It actually changes the mind set from "how much need to pay" to "how much I will get back as refund". But the problem is, more money will be taken out of your paycheck through the year and you need adjust your budget accordingly. That may sound like a good strategy but at the same time you do not want to give away Uncle Sam interest free money by withholding too much. A nice reality check is to use this year's return and keep the all obligations constant and see whether you withholding is right level. If you got too much refund reduce the withholding proportionately, on the other hand if you paid tax, increase your withholding accordingly.
2. If you have a stock which you have been waiting for years to bounce back up but never seen any signs, do not lose heart. That loser stock can still bring you money by reducing your tax burden. Just wait till the end of year and sell it if you do not see the sunlight for the stock. Buy selling the loser stock for loss, it helps to balance out the capital gains for that year, plus allows to take another $ 3,000 deduction (married filed jointly) in regular income. But there is a caveat to it. You need to avoid wash sale. You can not just sell the loser stock and buy the same stock with before or after 30 days of the sale. Then the losses you realized previously gets disallowed.
3. If you are expecting big medical expenses for that calendar year, you should be able to itemize the deduction by keeping track of the transactions and even medical miles driven. In order to do that, you need to plan and remember to save all the receipts of the expenses like hospital charges, co pays, medicines & prescription cost and much more. Track the medical miles driven and also add them in the deduction. Add these medical allowances on top of the health insurance paid from your pocket.
These are just a few samples and there are lots more too tax planning. Will cover some more in the other article.