The Top 6 Tax Planning Mistakes You Need to Avoid
February 2017 / By Charlie Howell / Contact Me
Taxes can be difficult to navigate. Legislation changes are common, and they appear complicated to the layperson. However, with careful thought and preparation, you can avoid some of the more common pitfalls there are.
Don’t Ignore Entitled Tax Deductions
Too many people fail to account for the contributions they made to charity during tax season. Taxpayers can receive deductions on the donations they have made to charitable outfits. But they often don’t consider them at the right time, sometimes for the inconsequential fear of inviting an unasked for audit. Taxpayers who worked for a charity should actually go a step further and add all the out-of-pocket expenses occurred to their cash contributions.
Name the Right Beneficiary for your Retirement Plan
Not naming a beneficiary could result in the money in your retirement plan account to be passed to your estate. This could force your heirs to clean out the account over a five year period instead of the course of their lives, which would greatly add to their taxes. Additionally, it is better to name your children as beneficiaries instead of your grandchildren, as that could add an additional generation-skipping transfer tax to be paid.
Pay your Quarterly Estimated Tax Payments on Time
If you have the ability to do this, do not put it off until the last possible moment. If you end up failing to pay this on time, you’ll incur a tax underpayment penalty which could be as high as 8% per year for every quarter the taxes are left unpaid.
Track Your Year to Year Carryover Items
Do not forget to include 2015’s state and local taxes that you paid in 2016 in your 2016 local and state tax payments. And definitely do not forget to carry over unused losses from a previous year over to the next. The same principle is involved for charitable contributions that you were unable to deduct the previous year.
Maximize your 401(k) Contributions
If you have contributed to the 401(k) plan in your place of work, you can use this as a tax shelter as this results in a deduction of taxable income along with an increase in deferred tax. Max out your contributions as much as you can afford to do so.
Use an Appropriate Preparer
Tax planning can be costly, especially if you use a preparer or professional services. Make sure that whatever preparer you’re using is cost-effective. You could save a significant amount of money by using a software or online service instead of hiring an accountant to do the work for you.
Additionally, be aware of investment structures that can have performance fees that involve you paying a proportion of performance to your manager. More complex fees can end up you paying entirely too much to lawyers and accountants, and could also cost a lot in terms of back taxes and court fees.