They are two of the most dreaded words in the English language: tax season. But for me, taxes are what I love the most about financial planning. Tax planning and preparation is what the entire staff at Asset--including myself--love most when helping our clients.
If you, like the millions of Americans that can’t stand this time of year, you are not by yourself. A new study found that around 1 in 4 Americans would rather wait all day at the DMV to renew their license than file their taxes.
Why wouldn’t they? Taxes are an extremely complicated issue. But, tax planning and preparation are an integral part of your financial plan. But a lot of people don't know the distinction between the two! So, let's start there:
Tax Preparation: A tax preparer simply files your tax return during tax season. Many use easy-to-use software options such as TurboTax or H&R Block or have a certified tax preparer file forthem.
Tax Planning: A tax planner takes a much more in-depth look at your finances and how they share strategies to maximize your deductions and minimize your tax liability.
The key difference between the two is that tax preparation is the physical act of doing your taxes. Tax planning is taking the time to brace for and navigate future tax liabilities an ultimately be tax efficient in retirement.
While filing your taxes ahead of the April deadline may take a few hours, tax planning is spending years positioning yourself and your investments to decrease your tax liability and maximize your retirement savings. The last thing you want is to finally reach retirement and have a ticking tax time bomb on your hands
So what are some ways you can decrease your tax liability? The more you understand tax credits and deductions, the more efficient you will be. If you are a homeowner, have children, work from home or have your own business, you may qualify for different deductions.
You can also reduce your tax liability by contributing to retirement savings accounts like a401(k) or a Roth IRA. Converting to a Roth IRA now will save you money on taxes when it’s time to withdraw. The sooner you do it the better because while you will pay taxes on the money you convert, all future withdrawals will be tax free.
Capital Gains Harvesting
Another way to become more tax efficient on your road to retirement is by harvesting your gains. Harvesting capital gains allows you to claim the money you've earned on your investments based on your current or future tax bracket.
We work with our clients to find the best path for them because no two financial plans are the same. What works for your friend may not work for you! Make sure you are working with a financial professional who will help you capitalize on the best tax window in history that we are in before the current tax laws expire in 2025. Our comprehensive approach includes in-house tax services and planning along with financial, retirement and estate planning.
As much fun as waiting at the DMV sounds, tax planning and preparation are two of my favorite topics to discuss with my clients. Nothing brings me more joy than seeing the smile on their faces when they see all that tax planning pay off in retirement. Planning is the best way to maximize your finances!
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.