PBMares Accounting Blog

Six Strategies For Your Tax Playbook

Posted by Louise Clayton-Kastenholz on May 23, 2017 10:59:42 AM

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I’m looking forward to tax day. No, I’m not in a time warp.  I do know that April 15th is behind us, and most people I talk to are relieved that they don’t have to think about taxes for another year (or in the case of those who extended their returns, until that last piece of paperwork shows up).  Often that sense of relief is due not just to the sense of getting through the process of the paperwork, but the whole thought process of dealing with the topic. 

But right now, now that it’s all over, is the best time to think about taxes, while the effects of this last filing season are fresh in the mind.  In sports, the coach looks at the team’s performance after each game and studies the strategies for weaknesses while the results are still fresh and the team has time to prepare for the next game.  Here we are with almost eight months left in 2017 to improve our game. 

We don’t know the exact layout of the tax structure for the rest of this year, that’s true, but neither does a team know exactly how the next opposing team will play.  But we can see the good and bad strategies.  In our financial lives we can see what works and what doesn’t work as well.  Besides, some strategies are just good in any situation.  Here are six strategies to help you prepare for next year:

  1. Look at the bottom line. So often we hear about strategies to reduce taxes that cost us in larger ways. I have often heard people say that they were advised not to pay off their mortgage so they wouldn’t lose the tax break.  But the tax break is the product of the tax rate and the interest portion of the loan payments, and is only a break if the taxpayer itemizes deductions.  How good is the interest rate?  What is the marginal tax rate?  How close is the total of itemized deductions to the standard deduction?  Did I even have enough deductions to itemize?

  2. Consider cash flows. Going back to that mortgage question, here is another side of that equation to consider: how does paying the mortgage every month affect your cash flow?  Is it worth the large cash payment out now to make that change?  If I buy a large item of equipment to get a nice business deduction, how long is it going to take me to pay it off? (and what will the financing cost me?)  Do I really want to make the changes required later to bring about the tax break now?

    What little changes can be made in the next eight months to make next year’s tax experience more pleasant and less costly?  Here are a few small changes we can make to our habits that can be a big help in facing the next tax day.
  1. Adjust your withholding. There are people who look forward to a big refund, but that’s kind of like putting the money into a savings account with no interest and no means of withdrawal. Perhaps that money could have been useful all year, so a reduction in withholding would give you a nice little raise.  If you didn’t need the additional cash flow, maybe it could go into your retirement plan and save you some taxes in the long run as well as working toward the long term goals.

    If you have that big bill to pay in April, perhaps withholding a bit more would save a scramble to pay out that big check.  If you are paying estimates as well as withholding, some additional withholding might help you to avoid having to make those quarterly payments.
  1. Do those little things that make it easier. Do you spend a long time gathering up your tax information, and lose things in the process? Keep a file handy when you have something that you need for taxes.  Even if the file itself is just a big envelope, it keeps everything together in one place.  If you have mileage to deduct, start putting that information in a log, or better yet on your phone, which is always with you.  Put memos into your check register, and little notes in that envelope. 

  2. Streamline your portfolio. Many taxpayers find themselves filing later and later because of the nature of their investments. Some investments tend to lead to corrected 1099s, some to late-arriving K-1s.  If you are invested in a partnership interest that produces a K-1 with minimal income (or a loss) and makes you file at the last minute, consider a change to an investment that produces dividend income instead.  Your investment advisor should be able to help you to find other investments that still meet your bottom line and cash flow needs.

  3. Talk to your CPA throughout the year. Besides being in better position to act on your CPA's advice before the year ends, you'll also be able to avoid some of those pitfalls that can happen when you don't take the tax consequences of an opportunity into account. We might also be able to help you to make use of tax attributes that you already have, such as carryovers of losses or investment interest expense, where we can find ways to help you save taxes that don’t' involve paying out for anything new.

New Year’s Resolution: Create a Financial Plan

So look behind at this last tax filing season for ways you can improve your game, and then turn around and look toward the next one with your eye on creating a winning strategy.

Topics: Tax Planning, Estate Planning

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Louise Clayton-Kastenholz, CPA

Louise is a tax manager in the Williamsburg office of PBMares, LLP.  She heads the estate and trust segment of the firm’s practice.

For more information, please contact the author at lkastenholz@pbmares.com or visit: www.pbmares.com.

 

 

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