While I took a short hiatus from blogging during the height of tax season in our office, the Dow Jones Industrial average blasted through the 11,000 mark—a significant level given the enormous drop witnessed in the fall of 2008. Time will tell if this will be a trading support level throughout 2010.
Having just come through tax preparation season in our office, though, I thought it prudent to take a moment to discuss tax planning versus preparation. Generally, the tax preparers in our office begin a meeting by asking some basic questions about financial decisions made over the past year…Did you buy a house? Did you collect unemployment? Was there an addition to your family this year? Did you purchase a car this past year? These are all reactive questions—answers provided after the fact, with little opportunity to change the tax impact.
There is a difference between tax preparation and tax planning. Tax preparation is simply completing your return: committing certain events to history and recognizing their tax consequences. Tax planning, on the other hand, is proactive in nature: you identify tax savings opportunities and create a roadmap to maximize them.
There is little doubt that with government spending and budget deficits exceeding previous records, the tax rates are going to increase. For that reason, now is the time to break the cycle of taking a reactive approach to addressing your tax exposure. This often looks at ways of reducing your taxable income, claiming potential tax credits, or, in the case of small business owners, optimizing your tax status (i.e, creation of an entity for your business to be able to use more tax deductions).
To get the true benefit of tax planning, have a strategy session with your preparer and your financial advisor. Get both on the same strategy page.
