Captain Edward John Smith of the RMS
Titanic: What Was He Doing April 15th?
Volume 13, Number 13
Issue 613
In April 1912, the RMS Titanic was bound for New York harbor with Captain Smith at the helm. Though he had all the best of intentions, the voyage didn't turn out the way that he, or the owners of the White Star Lines, anticipated. The Titanic sank on April 15th, 1912. Could the Titanic have sailed into New York Harbor if there had been better planning, planning that evolved as unanticipated events began to unfold. Would the "excellence" have been in the details through a plan that visualized an ever-changing climate?
If you prepare your own tax return, perhaps each year you sit down with all the best intentions to make the best of our confusing and complex tax laws and you want to make it into New York Harbor in April, too, with a sound tax "ship." Or, like most people, tax stress grips you and your journey is stressful and your ship sinks.
If you want to save on taxes, you have to have a plan. You usually need a captain (CPA or skilled and experienced tax-preparer) to guide you on the journey. To lower your taxes, you must have a plan that is put in-place at the beginning of the involved year and not 15 1/2 months later on the next April 15th.
The fact is that most people don't want to think about their tax return until the year is over. You have to have a plan that is adjusted through out the year and you need a captain to help facilitate and coordinate the agreed-upon goals. The few people that do have plans often spend too much time fretting over the plan rather than adapting the plan or seeking competent professional advice to get the plan carried-out.
The strength (or lack thereof) of all plans is that they adapt to changing circumstances as they unfold. Simply said, the best plans are continually evolving and getting better and better as they become more defined.
I once wrote the following as a step plan to lower taxes by making a personal income tax ship sail stronger and better. The following ideas are presented in random order (just like the deck chairs on the Titanic turned out to be in, in the end):
· Save the money to make your IRA contribution: whether it is a deductible one, a Roth, an educational IRA or a non-deductible one.
· Actually make your IRA contribution. I can't tell you how many times people don't make their IRA contribution because they didn't save up the money.
· Contribute the maximum to all employer-sponsored tax deferred retirement or salary deferral plans. Money grows tax-deferred there. If an employer offers matching money and you don't participate, you are losing free money.
· Work with a Certified Financial Planner and keep asking if there is any more that you could be setting aside on a tax efficient basis for retirement. In other words, "are you always doing the 'maximum'?"
· If you are self-employed, keep GREAT mileage records and entertainment records. People who don't keep good mileage records either grossly overestimate their actual mileage or grossly underestimate it at filing time. People who don't turn over the credit card receipt at the end of a meal and write who was present and what was discussed are likely to have their business entertainment expense deductions disallowed.
· Shift income to your children and/or employ your children (if you are self-employed or own your own corporation).
· Put a generous retirement plan in-place in your closely held corporation or small business.
· Lobby your employer to put a Dependent Care Reimbursement Plan in-place and to set up other fringe benefits.
· Do not EVER take early distributions from 401K pension plans unless your life literally depends on it and be aware of how important it is to attend to rollovers properly.
· Become politically active and actively support candidates who desire tax reform. Write letters to politicians explaining how you feel about over-taxation. Consider visiting a website about lower taxes (www.fairtax.org) and joining organizations that lobby for lower taxes.
· Buy and hold long-term growth stocks for as long as you can.
· Participate in as many dividend reinvestment plans as you can handle.
· Hold your tax-preparer responsible for generating original thought about how to lower your overall tax liability.
· Pay the hourly fees to meet with your tax preparer at least twice per year outside of the normal tax preparation process. The amount saved through tax planning will more than pay for the fees. You will have a renewed sense of confidence about your tax and financial issues.
· Own residential rental property. It comes with tax benefits from ownership while someone else makes the payment on something that you still own.
· Think about never selling any house that you buy. Balance the "gain on the sale of a primary residence" carefully against keeping the house as rental property. When you want to change residences, buy a new house and convert your old one to rental property.
· Remember that any tax strategy will involve either (1) getting rid of income, (2) recharacterizing income or (3) spending money.
With a few of these ideas, you will be doing more than just sailing around. You will be on a direct course to being more literate about your own situation. That is the key: be knowledgeable about your situation. Learn as much as you can and ask for professional advice.
David B. Robinson, CPA
Index of Previous Issues of Tax Fax
