Prevent Costly Mistakes With These Tax Planning Strategies

Life is full of mistakes. It’s easy to recover from the small ones and move on. Making mistakes when filing your tax return can be very costly and harder to recover from. You can lose tens of thousands of dollars in unnecessary taxes, as well as paying penalties, interest and representation fees.

Let’s Talk About Your Investments

Long-term capital gains come with a favourable 20 percent tax rate. For high-income taxpayers it can save as much as 19.6 percent off the ordinary income rate. Short-term gains are taxed at your ordinary tax bracket which can be as high as 39.6 percent!

Knowing when to sell becomes critical. If you can sell long-term investments before you sell short-term investments, you can save thousands of dollars. You can also offset your gains with accumulated losses from prior years or from other positions you currently hold that are in the red. Proper tax planning can also bring your long-term capital gain down to 15 percent. All you need to do is make sure that your taxable income is below $464,850 if you are married or below $413,200 if single.

It is essential to have a tax professional and create a strategic plan at the beginning of the year so you can mitigate the situation throughout the year. The alternative is to be stuck with a large tax bill at tax time when it’s too late to reduce your taxable income.

Look at this recent example. A new client approached our firm a few weeks ago seeking advice on selling their business. The expected gain is $700,000. We immediately suggested several income deferment strategies that will allow us to spread the income over 2 years and to bring her taxable income below the $464,850 mark. These strategies will save her over $35,000 in federal income taxes alone!

Other Costly Mistakes Involve Our Retirement Accounts

A common mistake occurs when taxpayers want to convert their retirement account into a Roth IRA. Many don’t realize that there are taxes owed on these conversions and that the taxes can’t be paid from the retirement account but only from other financial sources. They often times make the mistake of converting the entire amount, bumping them into the highest tax bracket. A better approach is to work with a tax professional and gradually do the Roth conversion.