An observation that I made a few years back is that a large percentage of my clients who file for tax extensions are also clients who owe taxes to the IRS. If you think about it, this makes sense because if you are someone who usually anticipates a larger tax refund, odds are that you file your taxes early in the year so that you can get that money back in your pocket sooner rather than later.
Whether you are someone who received a large refund or someone who paid a large amount in taxes last year, there undoubtedly are things that you may be able to do to be in a better tax position for 2014. A handful of people I meet during this time of the year are pleasantly surprised to hear that it isn’t too late to do some tax planning for the 2014 year, and in fact, this is actually the best time of the year to do tax planning. In the world of tax geeks, we call this Year-End Tax Planning.
What exactly is year-end tax planning, and why is it important?
Well, an analogy that I like to use is to compare year-end tax planning to a baseball game. Whether you are a Dodgers fan or a Yankee’s fan, during the game, one team often leads in runs over the other team. Maybe during the first few innings, the Dodgers are in the lead, and in the next few innings, the Yankees catch up and take the lead. But what ultimately determines the winner is what the score is at the end of the game. Similarly in the tax world, your tax liability is determined mostly by where your numbers stand on December 31st.
The fourth quarter of every year is the best time to do year-end tax planning because most of us have a pretty good idea about what our income and expenses are for the year. This allows our tax advisors to help run tax projections for us to determine where we stand in terms of our tax liability. From there, our tax advisors can assist us with developing strategies to implement before the year is over in order to minimize our taxes come April 15th.
If you have not done year-end tax planning in the past, here are some suggested action items for you to consider in the next 15 days:
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Year-End Tax Planning You Should Do Now
Before We Begin…
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If you have a bookkeeper, then make sure that they send you your most recent financial statements so that you can review them. Reviewing your financial statements is extremely important. Reviewing them with your bookkeeper can help you to identify any missing items that could be valuable tax write-offs.
If you are the bookkeeper, then make sure you are taking the time to update your records. Knowing where you are financially is the first step in making sure the correct tax strategies are put in place for you in 2014. Now, I know that it is extremely hard to carve out the time to do the bookkeeping, but make sure that you take the time to do it.
Even if you don’t do your bookkeeping now, you will still have to do it for the April 15th tax deadline, and if you think it’s hard to remember all your real estate expenses now, think of how much harder it will be if you wait until April of next year.
Make an Appointment
If your tax advisor is someone who works proactively with clients, chances are that they are going to be super busy between now and December 31st with planning meetings.
Therefore, as soon as you are done updating your finances, call your tax advisor and get on their calendar for a year-end tax planning meeting. Your tax advisor may or may not charge a fee for this meeting, but if you are working with the right person, the tax savings they find for you should significantly outweigh the fees they charge for this meeting.
Share Your Life Like an Open Book
During your tax meeting, be as open to communicating with your tax advisor as possible. Don’t expect to just sit down in front of them and hear about strategy after strategy. In my experience, it is almost always the conversation that is the most valuable.
Update your tax advisor on what has happened since you last got together:
- Did you buy more rental properties? If so, maybe a cost segregation can help you save taxes for 2014.
- Are you planning on selling a property? Timing the sale of that property to happen before the end of this year may help you to significantly reduce your taxes if you have a rental that has a lot of losses in prior years that you have not yet used.
- Thinking of quitting your job and/or moving out of state to do real estate full time? These types of potential changes are huge planning opportunities. For example, you may want to max out your bank borrowing potential before you lose that golden W-2. Maybe wait until January 2015 to give your notice so that your large accrued vacation payout is not taxed until 2015 when you will be in lower tax rates.
- Wonder if you are using the correct legal entity or if you can put more money into a self-directed retirement account? There are endless planning possibilities in this arena as well when it comes to year-end tax planning. Just make sure that you meet with your tax advisors and let them know what your goals are.
Having open communication with your tax advisor is encouraged at all times during the year, but it is extremely important during tax planning. Dedicate a little of your time and resources to tax planning in the next few weeks to ensure that you know what action steps you can take to significantly reduce your taxes for 2014.
Have you considered year-end tax planning yet? What suggestions would you add?
Leave me a comment below!