Tax Planning Arthur Godfrey, the American radio & television entertainer, said "I'm proud to be paying taxes in the United States. The only thing is - I could be just as proud for half the money." Tax planning is the process of creating or maximizing opportunities to minimize your tax liability. More simply, its finding ways to pay less taxes. We do this two ways; either looking at your current tax situation and seeing what might be changed in order to pay less taxes, or we can do tax projection in anticipation of future changes, to see how your taxes might change, and what can be done to minimize any increases. Tax planning is completely legal, and its important. Here's why: seemingly small and innocent changes to your finances can have drastic tax consequences, and over the course of your lifetime, untaken deductions and credits could mean tens if not hundreds of thousands of dollars spent on taxes that should have been yours. A Good Example One of our clients was retired and receiving income from three main sources; social security, dividends from a mutual fund account, and distributions from an IRA account. Because the mutual fund wasn’t performing well, the client’s financial advisor had suggested that they decrease the amount of distribution from the mutual fund account, and increase the amount of distribution he was getting from the IRA account. This sounded like a smart move at the time. However, IRA distributions are taxed as normal income, not just at capital gains rates. Plus, because of the economy in this year, many mutual fund managers were selling stocks and incurring capital gains, which are passed on to mutual fund owners. So this client received about $5,000 more in capital gains than the previous year, $5,000 more in IRA distributions, and because of this $10,000 increase, approximately $5,000 more of the social security benefits were taxable! So, to summarize, the client had to report a roughly $15,000 increase in income, when the client did NOT receive any more money during the year than he usually did. A phone call could have saved him thousands of dollars in taxes in this year alone. This is a perfect example of why tax planning can be a crucial part of your financial planning. Having a good tax advisor, whom you can call when you change, or are contemplating change in your finances, can help you avoid these pitfalls. Other Reasons For Tax Planning You're going to buy a house and need to know if you can decrease your tax withholding at work. You've gotten a raise and want to know what your taxes next year will be and what can be done to minimize them. You're getting married and wonder what will happen tax-wise when your incomes are combined. You want to know if and how much it would benefit you if you incorporated your business, or what business entity you should choose. You've bought investment real estate and want to know what to expect on next year's tax return. Has something in your finances changed? Call or email us to get some peace of mind. P: 925-248-6800    E: contact@alliedtaxplanners.com