Tax Preparation is not Tax Planning

More times than not after reviewing a new client’s tax returns, it is pretty evident of the lack of tax savings strategies.  Tax planning is not done in April when tax returns are filed.  Tax planning is a process that is done throughout each year.

Here is the latest example:  Client who is retired and working part time had adjusted gross income (AGI) of $7,000 after deductible IRA contributions of $5,500 for each taxpayer and spouse.  After itemized deductions of $40,000 and exemptions of $15,600 their taxable income was negative ($48,000).  This is an example of what we refer to as “wasted” deductions.

This is one of the worst examples of no tax planning and how it cost the client real money. Here’s why: in this particular year, the taxpayer would have qualified for a Roth IRA contribution.  Roth IRA’s are not deductible but all future growth in the Roth IRA can be withdrawn tax free in retirement.  Even by making the Roth IRA contributions instead of deductible IRA contributions, the taxpayer still would have had income of ($38,000), thus no tax impact!

There are number of other tax planning strategies that could have taken place in the year to use up the “wasted” deductions, but go beyond this short blog.

Assume the $10,000 of IRA contributions grows at 8% for 20 years.  Both the regular IRA and the Roth IRA could grow to approximately $46,000.  However, the withdrawals from the Roth IRA are completely tax free, while the withdrawals from the regular IRA are taxable at ordinary income tax rates.  At a 25% tax rate that is $11,500 of taxes that would be unnecessarily paid because of the tax preparer not taking the time to review the tax return and think through the recommendation.

Financial planning and investment management requires the guidance of a trusted and experienced advisor, such as a fee-only Certified Financial Planner™ (CFP®).

Click here to learn more about how these tax planning strategies can save you money, or contact Rob Lemmons, CFP®, CPA, AIF, CEPA at 513-984-6696 or via email.

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