DFI Wealth Management
Since 1983
Daniel F. Iuculano, AAMS
SM  CMFC SM
Income Tax Planning & Strategies

 

Daniel F. Iuculano

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Income Tax Planning & Strategies - a guide to keeping more of what you earn and paying less taxes.

Summary of Federal Tax Law Changes for 2010-2017 - bottom of page

Income Tax Planning & Strategies

One of the best definitions of tax planning I’ve ever read to quote an article “tax planning is the logical analysis of a financial situation from a tax perspective, to align financial goals with tax efficiency planning.”

The purpose of tax planning is to discover how to accomplish all of the other elements of a financial plan in the most tax-efficient manner possible. Tax planning thus allows the other elements of a financial plan to interact more effectively by minimizing tax liability.

Tax planning is many times confused with tax preparation, with only thought given to planning when preparing their annual tax return. However, little can be done to actually reduce your tax bill at that point. If your aim is to reduce taxes, you need to be aware of tax planning opportunities throughout the year.

 I would define tax strategies as a process or steps taken to accomplish ones goal of legally limiting tax liabilities through the use of tax avoidance not to be confused with tax evasion.

Tax preparation methods:

 (I’ve listed the three major tax software programs, there are others but not as well know.)

Note up until the filing of tax year 2010 the regulation or registration of tax preparers was nonexistent. Beginning in 2011, tax year 2010 most paid preparers must register with the Internal Revenue Service. Pay an annual fee and pass an examination demonstrating tax proficiency.

Tax Professionals

I have listed above based on my own personal experience, in order of expertise though years of experience and ability to apply knowledge in the real world carries even more weight.

Only Enrolled Agents, CPAs and attorneys may practice before the IRS.

 If you have legal issues or estate planning involving trusts then a tax attorney is your only choice.

Tax preparation Methods Advantages vs. Disadvantages

Tax preparation by hand – No cost other than a postage stamp and simple enough for 1040 EZ & 1040A forms. Good for basic filer with only W2 wages and no children. Only disadvantage I see is the possibility of math errors and delay in receiving a refund.

Online tax services – Free for federal tax return and can handle many forms and schedules as well as the ability to e-file. State returns are additional. If you have a more complex return than the free version provides or more hand holding, they offer a paid service ranging from as low as $9.95 and upward to $75 depending on your tax return complexity. Prices differ on each of the tax services.

Disadvantage is you may get marketing pitches from the company you file with. You may also have to wade through advertising. You may overlook deductions and credits that you were entitled to.

Tax Software – Can be purchased on a CD or downloaded online. One of the main advantages of using a tax software program is that they are fairly easy and quick to use. Tax software programs are usually step-by-step; therefore, many individuals can complete a tax return faster than on traditional paper and in less than half of time. Many taxpayers who use tax software prefer the software versions that offer both state and federal tax forms. The majority of software programs will transfer the information from a federal return over to a state tax return. This not only saves time, but it also guarantees that the information found on a state tax return is accurate.

Disadvantage much like its online versions assumes you are comfortable with the process and even though it walks you though step by step, in more complex situations you might find difficulty following along.

For a review of the three major tax software programs click the link.

Tax preparation companies – Here I am referring to the tax services of HR Block, Jackson Hewitt and Liberty. Having worked in the past with HR Block conducting training and tax preparation I do have insight to how these companies operate.

 Caution is advised when considering these services. The quality of the assistance you will receive can be all over the map. Tax preparer turn over is quite high as these companies pay quite poorly and the likely hood you will be getting an inexperienced preparer is high. So I highly recommend you ask about their years of experience both with their companies and elsewhere when selecting a tax professional. Tax preparation fees are generally based on what forms and schedules you are using and in some cases the total cost of the return can be quite high based on the complexity.

 These tax companies offer in addition to tax preparation a host of over priced bank products which are basically a short-term loan while waiting on your tax refund. Stay away from these as the interest rates are terrible and very costly. Each year these companies find more ways to part you from your refund by suggesting you purchase additional products from them. They do very little to demonstrate your financial best interest.

 Depending on which company you choose, tax professional training or lack there of can present problems. I can tell you that HR Block has and does offer and requires their tax professional to obtain and maintain ongoing tax education. With recent changes with the IRS requiring registration and passing an exam this should improve tax preparer proficiency within the next couple of years.

Certified Public Accountants Depending on the size of the CPA firm, a one man firm or larger accounting firm the qualifications may or may not be what you may expect. Many accounting firms today hire seasonal help when it comes to tax preparation. So your guess will be as good as mine when it comes to the quality of work being done.

 Perhaps it will make sense to inquire as to who actually will be preparing your tax return and their specific qualifications.

 In the past tax preparation fees have gone from very reasonable to outrageous. CPA’s are probably better equipped to handle an audit if needed and they are available to practice before the internal revenue service. My guess is that the IRS in an audit situation will consider a CPA a more qualified professional than others professionals though I am not basing this comment on any one thing, it’s just a feeling.

Independent Tax Services – This would consist of one man offices to larger firms including Certified Financial Planners, Enrolled Agents and any other tax firm with the except of law firms.

 Check out qualifications and years in practice as a tax professional. Bottom line is experience and the ability to apply ones tax knowledge that will make the difference. Some people will have the education and credentials. They are good at taking tests but when it comes to actually completing a tax return it might be another story.

Tax Attorneys – I will group these individual into income tax and estate tax attorneys. Income and estate taxes are quite different with separate areas of education needed. The majority of tax law firms deal with tax legal issues, back taxes and not so much with preparing tax returns.  Estate Planning Attorneys can deal both with income tax and estate tax issues along with drawing up trusts agreements and dealing with probate.

Tax professionals & their qualifications – First let’s review new IRS regulations concerning paid tax preparers.

 Beginning January 1, 2011, all paid preparers must have a Preparer Tax Identification Number before preparing returns and pay an annual fee. In mid-2011, the second phase of the paid preparer oversight program is scheduled to begin. They must pass an exam to demonstrate their competency to prepare federal tax returns. Once they pass the exam, they will become an IRS Registered Tax Return Preparer.

 In addition to a competency exam, IRS Registered Tax Return Preparers must take continuing education annually. The start date for continuing education courses has not been determined.

 Exceptions—the following individuals will be exempt from testing:

 Attorneys, certified public accountants, and enrolled agents who are active and in good standing with their licensing agency

I have provided several banner links for your convenience if you wish to purchase tax software, tax books or financial planning software.

Summary of Federal Tax Law Changes for 2010-2017
Updated  for Tax Year 2010