My name is Robert D Flach. I am a tax professional who has been preparing 1040s for people in all walks of life since 1972. I have been writing the popular tax blog THE WANDERING TAX PRO since 2001 and the NJ TAX PRACTICE BLOG for tax professionals who prepare NJ tax returns since June of 2006. In addition I also write about taxes for various professional publications and websites. Check out also my new tax blog TaxProServices and my writing blog Robert D. Flach.

Tax Planning 101

You are paying too much income tax – and it’s nobody’s fault but your own! You do not have to wait for Congress to pass a tax cut – you can enact your own personal tax cut with careful tax planning.

Tax planning is not just for the very rich. It pays off whether you are in the 35% bracket or the 15% bracket.

Let us review some of the basic concepts of tax planning, beginning with the most important.

• The first criteria for evaluating any transaction, strategy or technique should always be financial. Taxes are second. Don’t let the tax tail wag the financial dog.
• Taxes are only pennies on the dollar. There is no benefit in spending $1.00 needlessly to save 30 cents in taxes. You have not saved 30 cents – you have lost 70 cents!

Many, many years ago, when I was still an “apprentice” tax preparer, one of my mentor’s clients came in and proudly announced that his employer had offered to reimburse him for job-related mileage, but he turned it down because then he would not be able to deduct business travel on his Form 1040 (back then employee business expenses were deductible in full “above-the-line” as an Adjustment to Income).

My mentor avoided the temptation to tell the client that he was a complete idiot, and attempted to explain, with great patience and tact (two qualities that are a must for tax preparers), that it is much “more better” for someone to give you $1.00, tax free, than it is to be able to save 30 cents by claiming a tax deduction.

• There is an old saying in the tax business that “the difference between tax avoidance and tax evasion is the thickness of a prison wall” Tax avoidance is the lawful and ethical use of accepted procedures to reduce your tax liability. Tax evasion is a willful misrepresentation or concealment of information. Despite growing public acceptance of cheating on tax returns, reckless tax evasion is a very dangerous matter. There are many legal ways to reduce your tax liability – too many to risk your future with tax fraud.
• When preparing your tax return you are often given choices on how to treat a certain situation or item (joint or separate, credit or deduction, depreciate or Section 179). You should review each option and do separate calculations to see which choice results in the lowest tax.

Also consider how the various federal options affect your state and local resident and non-resident tax returns. Choosing one option may save $100 in federal taxes but cost $150 in state taxes.

• Tax planning is a year-round process, and must take into consideration both short and long term consequences. While handling a transaction in one way may result in a greater short-term tax savings, it may prove more costly in the long run.
• The application of any tax planning technique or strategy is dependent on the special “facts and circumstances” of each particular situation. There are no “written in stone” tax planning strategies that apply to all taxpayers in all situations. One man’s tax savings may result in another man’s overpayment. You must evaluate each technique or strategy considered in the context of your own special individual facts and circumstances.

In order to become a successful “tax-planner” you must first become more informed on federal and state taxes. It is impossible to know the right moves to make in your daily financial life without a basic knowledge of the tax implications of your actions. Learn what items you can, and cannot, deduct on your tax return, including the special items that are unique to your trade or profession and the rules governing any special situations that apply to you. Keep up-to-date on federal and state tax law changes. Even if you use a tax professional to prepare your return, the more informed you are on tax matters, the more prepared you will be when you go to your annual tax appointment.

Tax planning is not something you should attempt on your own – you need a “partner”. Just as you would consult a financial or investment professional for financial planning, you should consult a competent tax professional for tax planning. If you do not currently use a professional tax preparer you can find one in your area at www.taxprofessionals.com or by going to www.naea.org and clicking on “Find an Enrolled Agent” under the category “For Taxpayers” in the left hand margin.

TTFN

COPYRIGHT © 2008 BY ROBERT D FLACH LLC

(thank you Robert for all the great tips on tax planning.  It definitely is a year long process.  I know personally we constantly look and see if there are ways we can trim our taxes.  By contributing to a 401k we lower our taxable income, and while we could pay off the mortgage faster, it makes more sense to invest every full dollar instead of paying off the mortgage with 75 cents on the dollar).