For many, tax season is when you shove your financial documents at a CPA and wait to hear your fate. Will you need to pay in? If so, did you underpay to the extent that you must also pay penalties? Alternatively, you might be owed a refund. If so, you could have used that money to generate wealth instead of leaving it with the government for much of the year.
There are many ways to conduct your financial activities to create a more beneficial and predictable tax outcome for yourself. To take your finances to the next level, adopting savvy tax strategies is essential to go into the next tax season more confidently.
Your Greatest Investment: A Tax Strategy
Unless you’re a tax expert — and most people aren’t — you can probably only craft the most basic tax plan. Even if you have an accountant who regularly prepares tax returns – it isn’t the same as engaging a tax strategist.
As Lifestyle Investing guru Justin Donald explains, “Most people think that their CPA or tax planner is a strategist. And that is a horrible assumption to make – because most of them do not know how to do strategy.”
Even tax preparers who are knowledgeable about tax strategy do not consider it an integral part of their business model. Preparers tend to operate on a seasonal basis, with long hours during tax season. In addition, a lot of their clients approach them last minute, wanting quick-fire tips and tricks to reduce their tax bill. Therefore, preparers have very little incentive to be well-versed on their clients’ suitability for every credit and strategy in existence.
Tax strategists — good ones, anyway — keep up to date on the latest tax credits and programs that you can take advantage of. They can get a complete view of your income and wealth-building tactics. This allows them to craft short- and long-term strategies that let you keep or maximize as much of your wealth as possible. Given how frequently government incentives shift, expert guidance is invaluable.
It might seem unsavory to hunt for government tax incentives to suit your own purposes, but that’s why they exist. These tax credits and other programs are designed to be mutually beneficial. But unless you specialize in tax strategy, you’re probably unaware of most of them.
For example, numerous states currently have very enticing film tax credits available. States such as Missouri and Georgia offer these credits, hoping more individuals and businesses will invest in film productions there. More film productions typically result in money flowing into the state for the production, generating revenue for businesses surrounding the filming locations. People on the film cast and crew will likely stay in local hotels, eat at local restaurants, hire local caterers, etc.
Film credits are just one example of the credits and deductions at the disposal of savvy tax strategists. Thousands of state and federal agricultural, environmental, educational, and research credits are also available. Identifying them and planning your financial activities around them can change your entire tax outcome.
And tax savings can gain you more than just the dollar figure you would have lost. By reinvesting that money in revenue-generating activities or even high-interest CDs, those funds can amount to more over time. Say a tax credit saves you $20,000 annually, which you invest in mutual funds for an average annual return of 9%. In 20 years, you’ll have amassed around $1M. Tax reduction strategies can compound into serious wealth accumulation depending on the income you generate yearly.
When Going DIY, Don’t Burn Cash Without a Plan
If you aren’t ready to pay for a professionally crafted tax plan, there are still ways to think proactively about tax strategies. All too often, small business owners or high-earning individuals begin planning for the tax year when it is nearly over. There might be a flurry of spending in the final days of December. Rarely are these efforts part of a solid plan thought out over more than a few months or so.
While you might accomplish a small amount of tax savings through end-of-year desperation, substantial tax savings usually come from long-term planning. Even plotting out one year in advance can allow for strategies requiring research and setup.
Instead of trying to prepay expenses and offset revenue, think about how that money could be better spent. Whether making purchases to expand your current operations or creating entirely new ones, conscious direction is key.
For example, let’s say you’re the owner and operator of a small appliance installation service company. For the past three years, you’ve ended the year with excess cash and $900K in net revenue. If you’re a sole proprietor, that will result in a significant personal tax bill unless you can get that figure down. But what options are there besides maxing out your retirement plan or buying more — and possibly unnecessary — equipment for the business?
That’s where long-term planning comes into play. When you have more than a few weeks or a month to make decisions, you can switch from reactionary thinking to the long-term kind. Why not purchase or construct your own warehouse if you currently pay rent for appliance warehouse space? Not only would you have more control over your space, but you would also possess real estate in your assets portfolio.
A move like this wouldn’t be overly complicated, but it would not work as an end-of-year gambit. For starters, it would likely require reclassifying your business as an S-Corp instead of a sole proprietorship. But the bottom line is to consider options like these and map out their tax ramifications. This includes considerations not only for the current tax year but for future ones as well. Doing such long-range planning allows you to entertain more creative options for business growth and more accurately estimate future-year budgeting.
Take Control of Your Taxes
Sometimes, it might seem like you have no control over the amount of tax you pay to federal and state governments. If that’s how you feel, you likely need to be more proactive. The tax code is constantly changing and exhaustively complicated. But because of that complexity, there are opportunities for individuals and businesses to capitalize on.
Tax strategy is not just for the top earners, either. Even those with modest incomes can look for ways to stretch their wealth by not paying unnecessary, or unfair amount of taxes. To see results, you need to engage with a tax strategist or learn about tax-minimization tactics yourself. With either approach, you can go into tax season with the welcome feeling of things going according to plan.
