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Year-End Tax Planning, Part 2

dennis@surethingmedia.com (Dennis Sbrusch Jr.) — Thu, 15 Dec 2022 23:48:39 GMT

Year-End Tax Planning, Part 2

Tax Brackets

A tax bracket is a range of incomes that are taxed at given rates based upon the tax filing status of (1) single (2) married filing joint (3) married filing separate (4) head of household or (5) qualifying widow(er). For tax years ending December 31, 2022 and 2023, there are seven (7) marginal tax brackets ranging from 10% up to 37%; and if subject to the net investment tax (NIT), an additional 3.8%. Your federal tax bracket is the percentage of tax you will pay the IRS based upon filing status and taxable income. Filing status is important because it helps determine qualification for certain tax deductions, credits and your standard deduction.

Tax Deductions vs. Tax Credits

Tax deductions and tax credits are incentives the government provides to stimulate the economy. Current year spending is required to utilize the benefit of either. Tax deductions are categorized as below or above the line tax deductions that reduce the taxable income by which marginal tax rates apply. Itemized deductions related to homeownership expense, state and/or property taxes are the most popular and widely known tax deductions.

Tax credits are far superior to tax deductions because a tax credit will reduce your tax bill dollar for dollar; whereas, deductions only reduce your taxable income and tax bracket. Tax credits also fall in two categories; refundable or nonrefundable. You can benefit from a refundable tax credit even if you do not owe any taxes. A nonrefundable tax credit can only be utilized if you actually owe tax; however, the credit can be used to zero-out your tax bill. Neither tax credits nor deductions are allowed to be carried forward to future years but must be utilized for the current tax period.

Income

From a tax perspective, income can be categorized into three buckets: (1) taxable (2) tax deferred and (3) tax-free.

Taxable Income

Taxable income is earned and unearned income from all sources (except gifts, bequests, inheritances) that is adjusted for pretax, standard or itemized deductions and personal exemptions. In our progressive income tax system, tax rates rise as taxable income increases; hence the importance of tax planning strategies around income deferral and acceleration.

Tax Deferred Income

Tax deferred income is most commonly associated with retirement plan contributions where income has been deducted and set aside without current taxes being paid or withheld. Tax deferred does not mean “no tax due; but only, “no tax due at this time”. The premise behind trying to time when income is received, whether now (accelerating) or later (deferring), is the expectation of being in either a higher or a lower future tax bracket. The question then, is how do you get to that lower future tax bracket?

Tax strategy can provide a roadmap to get you there. Tax planning should be developed and implemented based upon your total wealth strategy picture; and will include tax acceleration, deferrals, deductions, exemptions, tax credit utilization, income shifting and re-characterizations, etc.

Tax-Free Income

Tax-free income is just that – income where no tax is ever due. There is currently only one avenue to 100% tax free income and that is health savings accounts (HSA). HSAs are pretax deductions and are tax-free when used for future medical expenses. Contributing to an HSA inevitably produces income re-characterization; where funds are repositioned from one category (deferred) to another (tax-free). Contributions to ROTH IRAs will also result in future tax-free income (zero taxes), as will converting existing IRAs over to Roth status. There are other advance planning strategies that can be customized for your particular situation to help you to achieve future tax-free income. Simply stated, max out your future tax-free income bucket and you are likely going to pay substantially less in taxes when creating a long-term wealth accumulation strategy.

A well designed tax strategy will leverage tax policy to lower your current period taxes while simultaneously repositioning your assets and income to permanently reduce or eliminate future taxes, by creating various sources of tax-free income within the context of your overall wealth building strategy. Please contact us know if you are interested in learning more about how to move from a “forever taxed to a never taxed” future environment.

Need Tax Planning Advice? Schedule Your Consultation Today.

Year-End Tax Planning, Part 1

dennis@surethingmedia.com (Dennis Sbrusch Jr.) — Thu, 15 Dec 2022 23:27:56 GMT

Year-End Tax Planning, Part 1

When it comes to cutting taxes, there is a huge difference between December 31 ^st , and one day later. With only a couple weeks left in 2022, it’s time to review your options to cut taxes before the end of the year.

A quick Google search will give you a litany of typical suggestions to reduce your taxes, like:

Maximize your 401(k) or other retirement saving plans
Contribute to Traditional IRA Savings plan
Fund your HSA
Make charitable contributions
Harvest investment losses
Prepay property taxes and future medical expenses
Defer receipt of bonus or salary compensation

In addition to the above, Business Owners can:

Defer customer deposits and prepay business expenses
Make equipment or asset purchases
Make qualified business property improvements
Make retirement plan contributions

All of the above will indeed reduce your current year tax bill coming April 18 ^th ; however, all require a “money” decision – free cash flow. Prepaying expenses maybe a good strategy for someone who has residual income, but maybe not for the person sticking to a regimented budget. Simply said, cash investments (spending) are required to take advantage of most tax breaks. It’s the basic premise of the tax code – tax breaks are related to the economic stimulus that corresponds to the current government’s agenda; which beginning tax year 2023, will be heavily focused on climate, green energy and related tax credits.

The best approach to a solid tax reduction and ultimately, a wealth accumulation strategy; is knowing how to change the character of your income from taxable to tax-free, understanding tax credits vs. deductions, and knowing your tax bracket. Let us know your thoughts about creating tax-free income streams.

Need Tax Planning Advice? Schedule Your Consultation Today.

Tax Planning in December

dennis@surethingmedia.com (Dennis Sbrusch Jr.) — Thu, 08 Dec 2022 15:34:14 GMT

Tax Planning in December

December is the last month to lower your tax bill for the 2022 tax year; however, the goal should be to identify and implement strategies that will effectively reduce your tax bill for years to come; or at a minimum, put you in the driver’s seat for when and how you pay the government “their fair share”.

Effective tax planning allows you to be in control of your money and your taxes. Did you know that almost every financial decision that you make will either increase or decrease your tax bill and wealth status? This point amplifies the importance of selecting the right type of tax professional to work with for tax advice and tax strategies that actually cut your taxes and save you money.

Let us take a look at the three types of tax preparers who typically facilitate annual tax preparation and advice:

1. Tax Preparers

This category of tax preparers are generalist and are normally classified as non-credentialed because they do not possess any professional credentials or licenses - no certifications or tax training required. Frankly, labeling them as professional borders on lunacy. They are usually seasonal employees or contractors who perform simple data entry tasks and offer little to no tax advice or planning because they do not possess the necessary skills to do so. These people are not subject to any continuing education requirements and cannot represent you before the IRS; which in and of itself indicates a minimum level of understanding with tax laws and changes that impact your tax return and planning options. Recommendation – avoid at all costs.

2. Credentialed Tax Preparers

The Enrolled Agent (EA) designation is an Internal Revenue Service (IRS) accreditation that requires tax preparers to either be former IRS employees or pass a three-part comprehensive IRS administered exam. The designation requires the EA to meet ethics and continuing education protocols for renewals.

The highest credentialed tax preparer is that of a Certified Public Accountant (CPA). The CPA designation is administered by the American Institute of Certified Public Accountants’ (AICPA) and demands rigorous prerequisites to take the uniform CPA exam and hold the license. CPA credential holders are required to have considerable and relevant work experience, higher learning, meet ethics protocols and also have annual continuing education and licensing renewal requirements.

Tax time responsibilities for CPAs and EAs typically involve the gathering of financial information and accurate filing of your tax return to ensure timely compliance with tax law; leaving very little time available for tax strategy. Additionally, most taxpayers are accustomed to getting preparers involved in the process between January 1 ^st and April 15 ^th when the opportunity for tax planning has past and little can be done to alter outcomes for current year tax bills. Additional crunch time constraints limit the ability of the credentialed tax preparer to develop the deeper skills required to construct comprehensive tax strategy.

3. Tax Strategists

Tax Strategists are however, tax experts that specialize in tax planning. They have extensive knowledge about tax law, regularly participate in continuing education around tax legislation; and are more likely CPA credentialed professionals. Tax Strategists help keep you compliant with all tax law, can oversee all communication with the IRS on your behalf; but most importantly, they help you save money on your tax bill each and every year!

Tax Strategist do not perform services in a silo. They work with you and your team to understand your overall financial picture, including your wealth and legacy goals. They then perform a thorough analyses and look for creative solutions to legally reduce your taxes and save you money on an ongoing basis through tax deferments, deductions, credits and permanent tax savings.

Tax strategies are never one-size fits all. There are many short and long-term tax planning strategies that a Tax Strategist can recommend. That’s why it is important to understand preparer roles and levels of expertise. One of the most important steps in building a successful tax or wealth strategy is selecting the right tax advisor who can help you formulate and execute strategies that have been customized specifically for you.

The ultimate goal for a Tax Strategist is to generate solutions that provide you with lasting tax savings that allow you to achieve your financial goals and build future wealth.

There is still have time to implement current year-end tax strategies to help reduce your taxes for 2022; however, it is imperative that you do not delay. Please make every effort to, at a minimum, contact a credential tax preparer or best; a tax strategist, to help you with 2022 tax planning opportunities and to start your 2023 and beyond tax strategy planning.