Have you ever met with a tax advisor and been told you could have done something about a tax problem if only you had acted sooner?
When most people think about tax planning, they usually think:
It’s something you do when you have your tax return prepared. It’s something you do at the end of the year.
While both of these times have a place in a tax strategy, often times it is simply too late or there is not enough time to get the best results.
This is why I am such a big fan of year round tax planning.
Year Round Tax Planning
Year round tax planning does not mean you spend the entire year working on your taxes. In fact, year round tax planning can be done in very little time and still have a big impact when it comes to reducing your taxes.
If you are developing your year round tax planning strategy, here are 3 areas to focus on:
#1 The Entities
Entities are one of the most effective ways to reduce your taxes – when used correctly. When used incorrectly, entities can increase your taxes.
Here are a couple of questions to ask yourself about your entities.
Do you need to change how your entity or entities are taxed?
Sometimes an entity is formed with the strategy that once that entity hits a certain level of income, then how that entity is taxed needs to change.
This can be a very costly tax mistake if it is missed. Do you need to add an entity or restructure how your entities are owned?
Knowing the right time and the right entity for your tax strategy can save as much as $10,000 per year in taxes.
Regularly reviewing the entities in your tax strategy helps ensure each entity is providing maximum tax benefits.
#2 The Numbers
I’m constantly sharing that tax planning is all about the numbers.
Many of the questions I’m asked I answer with – let’s run the numbers. Many tax strategies are based on income and expenses being at certain levels. It is not uncommon for these numbers to change during the year.
Certain changes in the numbers can impact the effectiveness of the tax strategy. It is critical to know when the numbers change so timely adjustments can be made to the tax strategy.
#3 The Documentation
When it comes to permanent tax savings, the 3 most important words are:
Documentation, Documentation, Documentation!
Proper documentation increases the accuracy of the information you provide to your tax advisor. This helps your tax advisor do more for you because they have good information. Proper documentation also provides the support the government will want to see if you are audited