Income Tax Planning & Strategies - a guide to
keeping more of what you earn and paying less taxes.
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 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
By hand using a calculator
Online tax service (Turbo Tax, HR Block & TaxAct)
Tax Software (Turbo Tax, HR Block at Home & TaxAct)
(I’ve listed the three major tax software
programs, there are others but not as well know.)
Tax preparation Chains (HR Block, Jackson
Certified Public Accountants
Independent Tax Services
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.
Certified Public Accounts
Certified Financial Planners
Tax Attorneys (Estate Planning Attorneys)
Others (chains such as HR Block
& small independents)
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.
preparation Methods Advantages vs. Disadvantages
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.
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
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
For a review of the three major
tax software programs click
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
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
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
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
- An enrolled agent is a person who has earned the privilege of
practicing that is, representing taxpayers, before the Internal
Revenue Service. Enrolled agents, like attorneys and certified
public accountants (CPAs), are unrestricted as to which taxpayers
they can represent, what types of tax matters they can handle, and
which IRS offices they can practice before.
Financial Planners – Some planners offer tax preparation as part
of their financial practice and would be in a good position to also
offer tax planning as they generally have the better overview of a
clients’ total financial picture more so than any other tax
professional. Requires a college degree
Accountant - A CPA is a professional accountant licensed by the
state. Because of their broad background, CPAs are best-suited for
corporate accounting, tax audits, and business consulting.
- A tax attorney specializes in working with taxpayers to solve
their problems with the IRS or state revenue department. In fact,
they generally focus only on tax issues and relief. A tax attorney
can help a taxpayer in trouble make it through an audit, have fines
reduced, liens removed, and can navigate through the minefield of
small business and self-employment tax issues.
professionals – qualifications may be very limited and generally
experience levels may differ from preparer to preparer. No formal
education is required.
I have provided several banner links for your
convenience if you wish to purchase tax software, tax books or financial