Many people think tax planning occurs around April 15 when what they are actually thinking of is tax preparation. The best time to start tax planning for 2014 was January 1, 2014, and not April 15th of 2015. Many of us are used to focusing on meeting deadlines. You might buy one of the popular programs or go to a tax preparer somewhere before that time and except for things such as contributing to an IRA, there are a few things you can do to affect your return for the previous year.
Tax Planning vs. Tax Preparation
Author and CNN Host Fareed Zakaria highlights that the federal tax code is over 16,000 pages. He has argued for a simpler tax code than the one that we have today. We certainly need more decoding of the code. Many people feel that they cannot afford the services of a CPA or Enrolled Agent and simply do it themselves. However, not many of us have time to read 10,000 pages of tax code to see what deductions we may position ourselves to qualify for.
The tax code in many ways is trying to direct social behavior. There are income reductions, deductions, and credits. Each one has value in reducing your ultimate tax bill. There are child credits, deductions for charitable cash and non-cash contributions, and credits for green energy improvements. Many of these things are unknown to the average person that may be able to qualify if only they had not. Once the tax deadline is over most people simply go back to their normal behavior and forget about looking into ways that they may have been able to reduce their taxes.
Tax Planning, Financial Planning, and Advisor Gamma
David Blanchett Head of Retirement Research, Morningstar Investment Management, says that tax planning is one of the key areas of value that a financial planner (CERTIFIED FINANCIAL PLANNER™ professional) can provide to clients. Let’s use this simple example if you made $10,000 on an investment you held for 360 days in your marginal tax bracket was 35% you would lose $3500 and only net $6500. However, if you had held that for 20 more days and then sold you would’ve only paid 15% in would’ve netted $8500 $2000 more I once worked with a stockbroker who felt that his only job was to make money for his client and that it was the job of the CPA to deal with the tax consequences. If the advisor did not have to work in your best interest you really cannot fault them for not making you aware of that as a consideration in the sale however, if you are simply compensating them for the transactions that they handle you could see why they may want to make money on the transaction now rather than see you pocket $2000 more.
I recommend that you have your tax advisor and your investment advisor ideally a CERTIFIED FINANCIAL PLANNER™ professional get together and discuss your case to see if there are opportunities. You may also want to include your estate planning attorney. I’ve seen cases where the advice given by a CPA was different than the estate planning attorney. This ended up costing the taxpayer additional monies when their tax returns weren’t coordinated.
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(1) This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
(2) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
