Terry Balding & Associates

"Your Partner in Success"

Income Tax Planning
Every year "Tax Independence", or "Tax Freedom Day" as it is sometimes called, comes later and later. Tax Independence Day is that day on which U.S. citizens have met their entire tax obligation for that year. For example, the average taxpayer worked until May 11th in 1999 in order to meet all of his or her federal, state and local tax demands.

For many Americans, preparing and filing tax returns can create unpleasantness and uncertainty. When you file your income tax return, are you:

• Unsure you have paid as little as you could?
• Frustrated by the records you have to keep?
• Concerned about what you will have to pay next year?

To most people, income tax planning means gathering up W-2’s, 1099’s, receipts and cancelled checks and either filling out the complicated forms or paying for the help of a tax preparer. But this is not income tax planning, it’s tax calculating. After December 31, there’s little you can do to reduce the previous year’s taxes.

Tax planning means planning for the year ahead, so that you have plenty of time for tax-reducing strategies. See a tax advisor early each year to answer your questions and/or to obtain more detailed information about the issues and answers below:

• What are your projected federal and state income tax liabilities for the current year, including the alternative minimum tax, if it applies to you?
• Will your current withholding and estimated payments avoid penalties and fines?
• What strategies can reduce your tax liabilities for the current year? When should you implement them?
• What records will you need to keep?
• Are there any recent changes in the law which affect your situation?
• Recent legislation has eliminated many deductions. What kind of strategies are available today?

There are five fundamental strategies for tax reduction:

• Timing income and expenses so that you pay the lowest total amount over several years.
• Converting taxable income to non-taxable income.
• Deferring taxes to a subsequent year.
• Shifting taxable income to someone in a lower tax bracket, usually children or grandchildren.
• Deducting expenses

What are some examples of timing?

• If you own an asset which has appreciated in value, you can control when the taxable gains are realized; sell and realize the gain in a year when your income is down, you have a loss, or your deductions are higher than usual.
• Prepay state and local taxes in a year when income is high or accelerate deductible contributions to your favorite charities.

What are some examples of converting taxable income?

• Buy tax-free municipal bonds as opposed to taxable fixed-income securities (but make sure the return is higher than the after-tax return on taxable securities).
• Sell your principal residence after living there two years and avoid paying taxes on up to $500,000 of gain. 

What are some examples of deferring?

• Invest in your company’s 401(k) Plan or, if self employed, a Simplified Employee Pension Plan (SEP).
• Invest up to $2,000 of earned income in an Individual Retirement Account (IRA).

What are some examples of shifting taxable income?

• Give investment assets to your children who are over age 13.
• Incorporate your business (but watch out if you own a personal service company).

What are some examples of deductible expenses?

• Alimony, as stated in divorce decree.
• Business expenses, if you are self-employed.
• State and local income taxes.
• Property tax.
• Moving expenses.
• Medical expenses, after certain minimums are met.
• Mortgage interest.
• Charitable contributions.
• Advisory fees, after certain minimums are met.

It is important to know that the tax law is extremely complicated with a myriad of exceptions and limitations. What exceptions and limits apply to you depends on your particular situation.

How do you get help?
If you would like professional answers to your questions, contact Terry Balding & Associates at (608) 837-9099 or tabalding@hirep.net. 

Terry Balding & Associates hourly rate for Tax Planning is $75.00.