No one can take a job, buy a house, get married, raise children, invest money or start a business without plunging into a sea of tax implications. While those implications are daunting, there are helpful principles you can use to keep your head well above water.
GETTING STARTED: TAKE STOCK OF WHAT YOU HAVE
The best way to start tax planning is to analyze what you have now. That list includes your job, your home, your family, your life — and health — insurance plans and your retirement program. Most people start with their latest tax return and run scenarios. What can you do to ease the tax bite next time around? What about your deductions and credits? How can you keep better records of your deductible expenses?
PRINCIPLES TO KEEP IN MIND
- Don't think of tax planning as something you do only once a year when preparing to file your tax return. To be really effective, tax planning must continue throughout the year.
- Be wary of making financial decisions — especially investment decisions — for tax reasons alone. It's the total payoff that counts, not the immediate tax savings. Tax-free earnings from a municipal bond, or muni, for example, may yield less over time than the after-tax gain from a taxable investment.
- Develop a long-term financial and tax strategy, and make short-term moves to fit that strategy.
- In shopping for investments, remember the difference between tax-deferred and tax-free (or tax-exempt) income. If the income is tax-free, such as the interest from a municipal bond, you'll never have to pay federal tax on it. If the income is tax-deferred, such as retirement-plan earnings or the increase in a stock's value while you hold the stock, you delay paying taxes until you withdraw the plan earnings or sell the stock.
If you received a return-filing extension in April, you still have time to file your return. But the dates of your estimated-tax payments don't change.
If your employer offers a flexible spending plan, sometimes called a cafeteria plan, which lets you set aside salary for qualifying benefits, such as medical bills, you'll be asked to enroll during the fourth quarter for the following year.