I frequently get asked if I think someone could use tax planning. Everyone wants to hear that I hold secrets that will unlock boatloads of tax savings for them. Why pay more to Uncle Sam if you don’t have to? But the truth of the matter is that tax planning involves enough time and cost that it makes sense to get an idea in advance whether or not you’re a good candidate.

I’m sharing this guest blog post from My Financial Coach that outlines what tax planning can do for you and who is more likely than others to be a good candidate to uncover tax savings during the tax planning process. You can view the original post by Jonathan Vander Werff, CFP® here: What Would Your Tax Planner Do?

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What Would Your Tax Planner Do?

Did you become a Bitcoin millionaire last year and cash in? Tax day is only a little over a month away and it’s almost time to settle up with Uncle Sam.

Are you self-employed? Have a rental property? Any foreign income or investments? Did you track your transportation expenses when you volunteered at your favorite charity? You should consider hiring a professional to help you file if your taxes are complicated. But do you hire a professional tax planner or a tax-preparer?

A tax-preparer looks back at the prior year and asks about what you might have done to reduce taxes. A tax planner does this too, but will also give you a plan to minimize taxes for the coming year. In other words, tax preparation is a reactive process and tax planning is a proactive process. Like a financial plan, a tax plan should be long-term in scope while offering the flexibility to address short-term concerns as they arise.

If your tax preparer is pointing out tax-saving techniques that you should have employed in the previous year, you’re missing out on a big benefit offered by a tax planner. If you were penalized for inadequate quarterly estimated tax payments, that’s a lack of tax planning. If you paid substantial capital gains taxes, it’s likely that a tax planner could have helped you minimize those taxes. Your tax planner might have suggested that you reinvest those capital gains into a Qualified Opportunity Fund in order to defer and reduce those capital gains taxes.

You know a child and dependent care tax credit is available, but do babysitter expenses qualify? Is anyone in your household attending post-secondary education? Don’t miss out on American Opportunity or Lifetime Learning tax credits. Maybe you have medical expenses, but not enough to take a tax deduction. You can still get a tax break with a Health Savings Account if you’re eligible. You might be one of the millions of people who’ve transitioned to working from home. You could plan on filing state income taxes in two states if your employer is located in a different convenience of employer state. If you’re not self-employed, you probably don’t get to write off home office expenses like phone service or internet. But maybe your state, California for instance, forbids employers from requiring you to incur work expenses without reimbursement. Your tax plan should make sure that you’re making the most of these credits, deductions, and state-specific requirements.

A tax planner would likely benefit a taxpayer who owns a business or interest in a partnership. What type of business entity makes the most sense for your small business? How do you properly employ family members? Does cash accounting or accrual accounting make more sense for your business? Does being self-employed mean you can write off the mileage of your daily commute? You need to know what miles to track and how to properly log those miles. A beneficiary of a trust should also reach out to a tax planner to identify the ideal taxability of distributions.

In the same way your financial coach will help you understand how major financial decisions impact your goals, your tax planner can let you know how that decision would affect your tax bill. Many of the concepts and tactics recommended by your financial coach should be performed in partnership with your tax planner, such as:

  • Managing your tax bracket, today and during retirement
  • Giving to charity
  • Converting pre tax IRA or 401(k) money to Roth
  • Tax-loss harvesting and rebalancing portfolio
  • Contributing to and distributing from qualified retirement plans
  • Selecting the most appropriate retirement plan for your small business
  • Asset allocation and location – do tax-exempt bonds make sense for you?

If the name of the game is minimizing taxes, what you don’t know can hurt you financially. As you and your tax preparer wrestle with your tax return this year, ask yourself if you feel prepared and confident about the filing. If not, an experienced tax planner is likely the professional to bring you some peace of mind that you’re paying no more than tax law requires. Reach out to your financial coach with questions about how taxes impact your financial goals or how a tax planner can help you.


Jonathan Vander Werff, CFP®

Financial Coach

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