“In this world, nothing can be said to be certain, except death and taxes” – Benjamin Franklin
In this day and age, Benjamin Franklin’s quote still rings loud and true. The difference now is that the majority of the general public has begun to realize the benefit of implementing a sound tax strategy. Why is this? Well, look no further than the abundant ads that pop up through the tax season touting bigger refunds for all or your fees will be refunded. This promise stands out to everyone including the young, newly employed seeking to claim their first big tax refund check to working families looking to splurge on a vacation trip and even retirees looking to cushion their Social Security or retirement incomes. However, a true tax strategy is only as good as the knowledge it’s based on. That, my friends, is why I am sharing the top five things that I wish I knew when I started paying taxes. Hopefully, this will help you as well!
- Leave those retirement accounts alone and watch them grow! In most cases, making regular contributions will help to reduce your taxable income and will result in some tax savings. Also, the younger you are when you start a retirement savings plan, the more your money will grow. Most people learn this very early on and will begin socking away some money. This is your opportunity to splurge on yourself and your retirement. Max out those contributions! However, many still see retirement accounts as a treasure chest to raid on a rainy day. Think carefully before doing this. Doing so could cause you to incur an hefty additional tax penalty of 10%….on top of the regular income tax you will be assessed. The withdrawal could also bump you up to a higher income tax bracket as it will most likely be treated as taxable income.
- Sure, the IRS will allow you to file an extension of up to six months on the submission of your income tax return, but you will also be assessed interest and penalties on any amount owed until you actually file AND pay the amount due. Most extensions are filed simply because folks believe that they can get an automatic, free extension on their submission, not because they actually need the extension (i.e. waiting for documents, etc.). You are actually better off filing the return if you have the necessary documents and applying for an installment plan. If you truly need the extension, pay as much of your estimated tax liability as possible with the extension submission.
- Bigger, in this case, is NOT better. When you receive a large refund, it does not mean that you have somehow gotten over on the Internal Revenue Service (IRS). Instead, it really means that you have given the U.S. government an interest-free loan from your hard earned pay. Think of it this way, when you owe taxes, the government charges you interest and penalties plus the amount of the liability. When the government owes you money, you get …..just your money. Instead, make sure that you review your paystub regularly and revise your W4 exemptions as needed.
- Choosing to DIY versus getting expert advice? Sure, I think that most people can figure out how to do their own taxes. However, I think the same can be said about a lot of other complicated tasks, such as building a house, fixing your car, etc. I will say that it takes time and knowledge to do the right job and let’s face it, the U.S. tax code can be daunting to get through. If your return just includes a W2 or two, you should be fine with most of the common tax software programs or just good old pen and paper. Anything more, it is suggested that you prepare to spend a good amount of time studying the code or at least consult with a tax professional every so often for a review of your previous returns and perhaps at least a check in for the current year. Better yet, consult with your tax professional to determine the tax strategy that best suits you. In Maryland and several other states, you must pass a comprehensive exam, attend continuing education classes, and be licensed to prepare and file tax returns.
- The benefits of tax planning/ strategy are numerous. The current U.S. tax code allows for many tax breaks that are not known to or fully understood by many taxpayers. Just look to the White House where the President-Elect can boast of filing a return that would allow him to avoid paying taxes for up to 18 years. While it angers many people, you have to admit that it if done right it is truly a pretty smart financial move. A move that is used regularly by wealthy individuals and corporations….legally.
Lisa-Marie Gross has worked in the banking and finance industry for 18 years. She is experienced in the areas of banking, commercial finance, and small business accounting and consulting. She is a Registered Tax Preparer and co-owner of CLM Financial LLC, a tax and accounting firm in Rockville, MD. (www.clmfinancialllc.com)
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