What tax planning steps do I need to be taking for 2008?

Hello, my name is Ron Blue and I used to do tax returns. When I was in my early 30s I had a CPA practice and I don’t know how many hundreds or maybe even thousands of tax returns that I did. And it was really common for me to get the question when we were preparing the tax return, “What can I do to reduce my taxes?” Well, realistically when you are in January, February, March, or April and doing your taxes or meeting with your tax accountant, it’s too late to do anything for the prior year. The only time you can do something for the prior year is before the end of the year. The only exception to that is an IRA or some retirement plan contributions. Other than that, you need to do your tax planning and it needs to be completed by the end of the year

Well, the over simplification or the conceptual framework for tax planning is: if I can defer income and accelerate my expenses, it will reduce my taxes this year. So, maybe it’s a bonus that I can defer, maybe it is some extra income that I’m going to earn and I wait to earn it in January instead of December so that the tax burden on it is delayed for a year.
But, in the area of tax deductions, there are several things that I can do. One, and most significantly is that I can increase my charitable giving before the end of the year which is one of the reasons that we get so many funds appeals in December because people tend to think about tax planning near the end of the year and there aren’t many options left with the exception of doing your charitable contributions.

Now, I don’t believe that most people give charitably out of a tax motive. I think that most people give when they give charitably out of a charitable motive. But, if you’re going to give, do it before the end of the year.

Perhaps you can pay your property taxes before the end of the year. Perhaps you can prepay some interest on the mortgage that you have that’s a deduction. You can do things like that to prepay, to reduce your tax burden for this year. But just remember January 1 it’s too late in almost every case to do anything for this year. I’ve got to do my tax planning before the end of the year.

And I would say this: think about next year’s taxes in January when you are preparing the information to do your return. Plan on the taxes that you’re likely to pay in this current year in January. Do your tax planning early as opposed to at the end of the year.
It’s very, very simple to do. All you have to do is to take your tax return when it’s done. Make a copy of it. On each page fill in the numbers (pencil out next to the numbers) that you have for the prior year what you’re likely to have for this year and calculate it as if it’s this year. That will show you if you’re withholding enough or if you are paying enough on estimates or what do you need to do to reduce your taxes.

But remember this: every tax deduction costs you something. I tell people a lot of times – if you want a guaranteed $1000 reduction on your tax return, just give me a thousand dollars (loan it to me) and I promise I’ll never repay you. You get to write it off as a bad debt and I have to record it as income. Now who’s better off? Well what I just described was interest. I described a tax deduction. Every tax deduction works the way I just described it. So, even though you get the deduction, it always costs you something. If you’re in the maximum tax brackets and you spend a dollar to get a tax deduction, you’re going to save 40 cents in taxes, true, but it’s going to cost you 60 cents out of your pocket. The reality is that no tax deductions are better than some tax deductions. That goes counter to almost everything that you’re going to hear, see, read – that you’re going to hear about from a tax-planning standpoint. But the fact of the matter is that all tax deductions cost you something. Just remember that in doing your planning.

Never, ever let the tax tail wag the financial dog!


Click here for the November 13, 2008 Blog Entry