Although most people think that an accountant’s final product, the tax return, is where all the work happens, the fact is the tax return is just the final product.  Determining how the tax return will look and what will be in it is really where the work occurs.  This occurs by Tax Planning.

 Tax planning is a tool that allows taxpayers to potentially and legally minimize their income taxes. 

The IRS’s mission is not to collect the most taxes from each person (although it tends to appear that way).  The IRS’s mission is to “Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all”. 

Therefore, each taxpayer has the right to use every tax law available to minimize their income taxes.

In some cases there may be no way to change the outcome of the income taxes.  Even in those cases, it is helpful to know how much money will be owed on April 15th.  In a case where there will be overpayments it may be possible to reduce federal and state withholdings or quarterly estimates. 

There is no requirement to give the government an interest free loan; however, there is a requirement to not underpay taxes either.

Taxplanning involves taking the actual year to date tax information and determine the additional tax transactions through the end of the year and prepare a tax calculation, a expected tax return.

From this expected or estimated  tax return, I can advise my client if they have the ability to control certain transactions, whether to accelerate or postpone income, expenses or equipment acquisitions.

Sometimes the tax planning is calculated to determine the tax that will be due if a certain business assets (buildings, equipment or businesses in general) are sold.

One thing I always explain to my clients, taxes should not be the only reason to determine if an investment should be sold.  The economics of the transaction should be the primary reason. 

An example of this if a stock is owned for less than 1 year (the sale of which would create a short term gain subject to regular income tax rates), should the investor wait until the stock becomes a long term capital gain to obtain the reduced tax rates (Tax Facts About Capital Gains and Losses).

If you are not sure if the investment will maintain its value it may make sense to sell it before it becomes a long term capital gain. 

The results of tax planning can provide advise relative to investment strategies.  Should the investor invest in more growth, municipal bonds or other investments. 


One response to “TAX PLANNING

  1. Isaac:

    great post. nice to get the inside perspective. keep up the great writing!


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