Most of us don’t even think about our taxes until after the New Year. After all, most personal tax filings aren’t due until April 15th. If you’re really going to bring your A game when it comes to tax planning, you need to start now.
Denise Alexander, CPA and President of TaxWise, Inc. in El Dorado Hills shared some of her insight and pitfalls when it comes to personal tax planning. Denise explains, “shortly after each calendar year ends, most taxpayers are are focused on how large their IRS refund will be but using the IRS as a savings vehicle will rarely leave one better off financially.” Denise shared five areas to consider when planning the annual dance with the IRS.
Whenever a person takes on “1099” work versus W-2, the tax consequences can be dramatic. 1099s are subject to an additional tax of about 15% (a.k.a. self employment tax). This is the same tax that gets paid when you are an employee except the big difference is that the employer pays half and your half comes out of your paycheck. Because of this, many folks who received 1099 income are surprised by how much tax is owed.
Long and short term gains:
Understanding the holding period of capital assets (like stocks and bonds or mutual funds) is critical. The tax rates can be dramatically different between the two categories. It may be only a matter of holding an asset a few days longer to reap a large tax savings.
Finalizing your divorce without understanding the tax implication of who claims the children as exemptions can be costly. Depending on the income each party earns, there are tax credits that may go unused if the exemption is taken on the higher earner’s tax return.
Withholding too much from your paycheck:
If you’re getting a large refund at the end of the year from the IRS or state, you’re probably withholding too much from your paycheck. The IRS doesn’t pay interest to those that overpay them, in most instances. Don’t count on receiving a toaster or even getting a thank you note. A better option is to make the necessary tax withholding adjustments so you keep more of your money throughout the year. Those funds could go toward other retirement accounts, college savings plans, or to pay off debt.
Early IRA distributions:
This area of the law can be confusing to most. Simply plugging in numbers, after the fact, into tax preparation software might help a tax payer report what happened in a given year, but it leaves no opportunity to plan distributions in a tax efficient manner. Early distributions often occur in a year when the taxpayer has had a financial setback. Waiting until the last minute may result in lost opportunities to help offset some of the additional taxes and penalties incurred from the early distribution.
Please remember this should not be considered tax advice. Make sure to consult a tax professional for guidance on your personal situation. Take the time to start tax planning now. A little planning now can go a long way toward minimizing taxes and avoiding some costly pitfalls. For more tax planning information, visit the TaxWise, Inc. website or connect with Denise Alexander, CPA on LinkedIn.
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