Five basic steps everyone can take to minimize their taxes
Filing Deadlines are not Important for Tax Success
If you read this on the day is is first published, there will be about a month left in the 2017 tax filing season. I don’t know if you filed your taxes already, if you plan to file in the next month, or if you plan to ask for an extension until the fall. And, since this article will remain in the archives, it may be the 2020 tax season you are worried about.
But whatever your tax filing habits, I want to take this opportunity to remind you that filing your taxes is not the most important part of the income tax process.
“Huh? ” You probably are thinking, “There are deadlines, and penalties if I don’t file.” That is true, but the most important tax deadline every year is December 31. You see, the tax return is simply a report of what you did financially during the previous year. Once the year ends (with a couple of exceptions) you can no longer make changes that can help you control your tax liability.
No matter how many articles you read or TV tips on saving tax dollars you watch on the evening news, you cannot reduce your tax burden for the year for which you are filing the return.
A tax return is sort of like an autopsy. It is simply an examination and report on what you did. And now that the year is dead, there is no way to fix any mistakes you may have made.
But, unlike an autopsy, last year’s return can show you the way to better financial health for this year and the years ahead.
That is what I prefer to help you with. Throughout the year I provide emails, blog posts and a variety of events that help you plan your financial affairs to increase your business profits and minimize your tax liability. Clearly, not everything I write will apply to your personal situation. That means you should not do everything I mention, because it might be just the opposite of what makes sense for you and your family.
But just to get started, here are five things that make sense for just about anyone.
1. Don’t use credit if you can possibly avoid it. This may seem strange as tax advice, since there is no relationship between a tax return and a credit card. But there is a very powerful collateral issue involved. If you buy something on credit, you have to pay it back. That means that you have to earn more money to pay it off (more taxes). Unlike other new income, however, this is already committed to repaying the debt. And so the taxes along with the interest you pay simply increase the cost of the item you originally bought on credit. And that cost adds up for as long as it takes to pay off the debt.
2. Save more money. This is the other side of the “no credit” coin. If you are a saver, then you can pay cash for what you buy. You also have the security of knowing you have extra cash to deal with emergencies. And, the money you save has already been taxed (mostly), so your purchase does not have a constantly increasing cost from future taxes.
3. Plan your retirement no matter how young you are. To be sure, the older you get, the more detailed the plans should be. But, the older you get the less effective your plans will be if you are just starting out. This is the “mostly” comment I made above. Qualified retirement plans like 401(k)s from your work, or IRAs that you voluntarily set up have tax consequences for your entire life and beyond. If you are young, just throwing money into a retirement plan is about all you need to worry over. But as you get older, and I don’t mean age 64, you need to start working with a financial planner to organize and consider the effects of your savings when retirement comes. This is when the tax laws have a direct impact on your life. Don’t overlook this.
4. Build a team of experts. Whether you are a happy individual in your job or a business owner, you need experts you can consult. And I don’t mean Money magazine and Turbotax. I mean real people who you can talk to and who learn about you and your situation. But I don’t mean Uncle Bob (unless he is one of the experts I’m about to mention). Yes, you will need to pay them. Most such experts will have a range of options that will fit into your spending plan. Take advantage of a tax person (or accountant if you have a business), an insurance agent (for both life and property and casualty), a lawyer (or a program like LegalShield), and a financial planner (who may also be your life insurance agent), and a banker (especially if you have a business). Get acquainted with them and learn how they like to work and whether you make a good fit. Don’t be afraid to try out a couple of each before you make a final selection.
5. Now that you have built that team, do what they say. And ask them before you take any action on your own. This may seem like a “duh” kind of advice. It is not. I cannot tell you how many clients have started a conversation with, “I don’t know whether I should have done this or not….” Then they tell me something that usually has cost them a good deal of money in unnecessary taxes. Ask first, then make your decision based on the response.
If you do these things you will be in the best shape possible to build a solid financial life. And I’m proud to be a part of the lives of my clients, because I believe I really make them better off. I help them minimize income taxes, I steer them to other experts I know, like and trust, and I help them plan for events as life goes on.
You may have other questions about specific issues with your tax return, I understand that. Call or email me and we can get together and deal with those. But you need to do it fast, because my time fills up the closer we get to the filing deadline.
But when we talk about these specifics, I’m going to start steering you toward what you need to do now to fix your tax problems for this year before the next filing deadline. I’ll bet there are a lot of groans and moans out there from those who just want to get the taxes filed and move on with their lives. This program I am suggesting is actually the best way to do just that.
If you have any doubts, read the next blog in the series. But, for now, get started on these five steps.
Your comments and ideas are always welcome. Please let me know what you think.