Why Now is the Perfect Time for Tax Planning
Proactive personal tax planning is a year round exercise under the best of circumstances. At the very least, the final 3 months of the year should attract one’s attention in this important direction. Taxes are an expense and good stewardship involves the control of this expense to the extent possible. It is truly disheartening to discover after the fact that a few simple steps could have resulted in financial benefits to the taxpayer if only they had been proactive in their tax planning.
Income tax return preparation next year will reflect the extent of tax planning this year. Consider using this year-end tax planning worksheet which accompanies this article; it may be helpful to review this checklist while reading these general comments to make the exercise more effective.
Review Last Year’s Tax Return for Key Insights
A good place to start planning is the tax return from the previous year. Start with the top line, income for this year. If there is an increase, it then becomes important to understand why. The important part about understanding why is the nature of the increase. Did it come from earned income, investment gains, a sale of a large asset, a distribution from a retirement plan, a legal settlement, or some other source? The tax treatment of income can vary depending on the source. The legal offsets available to the income sources will vary as well.
Identify Major Expenses and Losses to Reduce Taxable Income
Next check if there are significant expenses in current this year that were not incurred last year. Also, did income reduce from last year? Casualty losses, investment losses, reduced salary, changes to the treatment of business income, and terminated legal payments, are all examples of these. Some can help reduce taxable income and the eventual tax due next year.
As always, I advise seeking advice from a qualified professional while completing your year-end tax planning. The tax preparer who signs off on your tax return is the ultimate and final word on what you can and can’t do. If you would like to make a charitable contribution to mitigate an increase in taxable income, please contact our Executive Director, Lindsey Hardegree to see what opportunities are available to you!
Pat Renn
Pat Renn (he/him) is the founder and president of The Renn Wealth Management Group and has more than 35 years of experience in the financial services industry. He is a member at the Cathedral of St. Philip where he has previously served as junior warden and endowment chair; he has also served as board member and endowment chair of Holy Innocents' Episcopal School.Learn more about the ECF Board of Directors.