Your Tax Strategy And Your Tax Return
The last few weeks I have been sharing the details behind my list of 5 Planning Tips for After April 15th
. This week I'm sharing the details behind:
Planning Tip #5:
Get your tax return done If your return is on extension, it's time to get it done. Most people don't look forward to the preparation process which makes it tempting to procrastinate. But your tax return is a tremendous tool in your tax planning so getting it done sooner may mean paying less tax sooner.
BUT, if you do not have a tax strategy yet, then you definitely want to get this done before you file your tax return.
What is a Tax Strategy?
A tax strategy is a step-by-step action plan that ensures you are paying the least amount of tax allowable by law, regardless of your business or investment situation.
A tax strategy is comprehensive. It considers:
Your personal and financial goals and dreams
Your business, your investments and your family situation How your businesses and investments are owned
The appropriate entity structure for your business and investments
Your current situation to uncover deductions and other permanent tax saving opportunities
Your Tax Strategy and Your Tax Return
Your tax return is where the tax savings from your tax strategy are captured. Waiting to file your return until your strategy is done can provide more flexibility and opportunity in your tax strategy.
Here's how.
When you file your tax return, you are taking a position. For example, claiming your home office as a deduction on your tax return is taking a position. You are taking a position on how the area of your home office is calculated.
Consider this scenario: Pierre files his tax return claiming his home office as a deduction. He calculates the area of his home office to be 10%. After developing his tax strategy, Pierre learns that his home office area is actually 20%.
If Pierre has not filed his tax return, he can claim the larger deduction. If Pierre has filed his tax return, then claiming the larger deduction could be more challenging because when it comes to tax returns, consistency is very important. If Pierre files his tax return using 10% and then changes it to 20%, he will have more explaining to do.
Keep in mind too that it is not only how a deduction is calculated that may change, but where a deduction is claimed. Your tax strategy identifies these key positions.
Your Tax Savings Don't Stop with Your Tax Strategy
After you develop your tax strategy, it's time to implement it and maintain it.
This includes:
Creating and maintaining the appropriate entities
Obtaining bank accounts and credits cards
Formalizing agreements between partners and different entities
Setting up and staying current with the bookkeeping
Keeping proper documentation to support your tax strategy
Filing your tax returns so they are consistent with your tax strategy
The implementation and maintenance of your tax strategy are just as important as creating your tax strategy.
by: Tom Wheelwright
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