Creating a Financial Plan – Income Tax Planning
When creating a financial plan the subject of taxes and how to limit your tax liability is of importance. Tax planning is the subject of tax avoidance and not tax evasion. The difference is tax avoidance is the method of reducing your taxes owed year to year legally.
Income tax planning deals with taxable income earned each year vs. estate tax planning which involves taxes dealing specific with the valuation of an estate usually paid upon death.
I will cover estate planning in a future post which also covers Wills, Trusts and other tax saving strategies.
To start gather together three prior years of tax returns. Depending on your specific needs and knowledge you might like to consider seeking help from a tax planner such as a tax lawyer, accountant or tax preparer.
Keep in mind that tax planning is not the same thing as tax preparation. Tax planning is the process well in advance of when it due, that assists you in reducing your tax liability through tax deductions and credits. Tax preparation is the process of placing the data on a tax form for filing purposes.
Where does one seek help?
Of course you can do it on your own, certainly it’s the cheapest method assuming you know what you are doing. It can be very expense method if you don’t know what you are doing.
Tax Attorney – some law firms actually prepare returns but the use of a tax lawyer is generally needed in complex dealing with the IRS or in the case of legal problems.
Enrolled Agent – This individual is in my opinion the best qualified expert in the area of taxes as they have passed a very tough test administered by the IRS on all areas of taxes which include not only individual but also partnerships and corporations.
Accountants CPA’s – Well trained in the area of taxes though not all CPA’s practice tax accounting.
The three above professionals are the only individuals allowed to practice before the IRS on behalf of their tax clients.
Certified Financial Planners – Not all planners are tax planners but all go through special tax training program in ordered to be certified.
The Rest – The last group are tax preparers hired by tax firms such as HR Block, individuals operating from their home, bookkeepers, etc. May or may not be well trained and in the case of tax preparation firms like HR Block, turn over is high and in many cases you will be dealing with a first or second year preparer.
I suggest you quiz them on their specific tax knowledge and experience before allowing them to prepare your return.
Daniel Iuculano, CFP
Certified Financial Planner