Monday, April 25, 2016

Filing may be complete, but tax planning is ongoing

FROM http://www.washtimesherald.com/

The countdown for filing 2015 tax returns is finished, and the taxes are off to Washington. While some Americans have already cashed refund checks, other families had to grin and bear the burden of the marginal tax rate.
There are two tax systems at play in the U.S., and some politicians proclaim there is one system for the rich and another for the poor. But the reality is there is one tax code for the informed and one for the uninformed.
Start a conversation about taxes, and it quickly becomes clear that many people don’t understand their returns or how taxes work. Everyone with earned income (a job) pays into Social Security and Medicare. Those contributions are never returned nor deferred when you put money in a retirement plan like a 401(k) or IRA. This creates plenty of frustration when you hear that over half of Americans don’t pay any taxes. But that oft-quoted statement is wrong. What is true is that about half of U.S. tax returns use the marginal tax brackets.
Your tax return is similar to a symphony where instruments work in unison. Although I can’t tell you what musician is playing especially well, even my tone deaf ears can identify the instrument that is out of tune! Your tax return works the same way, in which one line works with the next. Just one bad financial decision during the year can create an input that creates negative consequences on the rest of your return.
Albert Einstein described insanity as doing the same thing over and over while expecting a different result. Every year individuals pick up their taxes from their CPA firms, and gasp at the amount owed. Then they complain, scribble their names on a check, file the return in a drawer and repeat the process the next year. Insanity!
Tax planning is a central part of financial planning and needs to be conducted before Dec. 31, not April of the following year. April is the season to tax report. The number of individuals who spend countless hours on investment statements but disregard their 1040 tax return is staggering. In my humble opinion, there is no entity that will separate most American families from their retirement more dramatically than the IRS. Markets go up and down but rarely does the IRS send a check back!
As we conduct financial planning in 2016, our objective is to be as tax savvy as possible. Pay attention to line 43 on your tax return and find out how much income was actually subject to taxation. Once you know that number, you can make some very important decisions including whether you should consider a Roth IRA or contribute to a college fund. The IRS provides us a rule book but it is our job to use those rules to create the best possible scenario during the year so that our accountants can provide savvy tax reporting next April.