Are You Prepping or Planning?

Income tax season is upon us as 1099s fill our mailboxes and the filing deadline looms just 60 days from now.  Many filers will turn to Turbotax or other software and nervously complete the forms, hoping not to make a mistake that might bring on the wrath of the IRS.  They may also be anxiously awaiting the final number, hoping that they’ll get a tax refund and not have to “pay” taxes this year.  Other taxpayers will dump their tax documents on their professional preparer and hope for good news when the filing is complete.

For most Americans, tax filing is an annual chore and falls into the same category as visiting the dentist.  But for many taxpayers, income taxes is their largest expense, even more than their mortgage payment.  Yet they wait until this time of year to find out what their 2020 tax bill will be.

At this point, 2020 is history.  There are a few minor things that you can do to alter your 2020 tax bill, but the deadline was December 31st for the tax year.  And there were probably a number of things you could have done a couple months ago to minimize your tax bill.  But, if you’re like most Americans, you didn’t do any tax planning.

Tax forms

Tax planning needs to be done during the tax year and you need to understand your effective marginal tax rate.  That is, if you add another dollar of income, how much will you owe in taxes on it?  And vice versa, how much is that extra deduction worth?  The tax law is complicated and seemingly low-income people can find themselves with a very high marginal rate.  You can read about the “tax torpedo” in our last On the Money print newsletter.

Good tax planning doesn’t just look at the current year, though.  Some people and even their accountants get excited by seeing a very low or even zero tax bill for a year.  But if you just deferred taxable income until a future year when it gets taxed at a much higher rate, then you’ve missed out on an opportunity to reduce your overall taxes over a few years.  You may have even had an opportunity to take some capital gains at a zero tax rate but, without planning, the opportunity is gone.

Tax planning is something that should be considered during the year, especially toward the end of the year when there’s more certainty around your level of income, capital gains and the latest tax laws.  At Vintage we’ll mock up our client’s tax returns before the year is over in order to look for tax planning opportunities.  It may mean a partial Roth conversion, taking capital gains at a zero tax rate, or determining whether or not to itemize deductions.  And, of course, there’s all kinds of other decisions like Roth vs. Traditional IRA/401(k)s, mortgage financing options, and how to maximize the tax benefits of charitable donations.

It’s too late to do much about 2020, but this year you can start planning instead of hoping for the best.  You can get a look at multi-year strategies and consider the inevitable changes to the tax laws and how best to minimize what may be your biggest expense.  At Vintage, our team of fiduciary advisors includes CPAs, CFPs and Enrolled Agents.  Contact our office to see how we can help you as you move ahead.

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