Are You a Day Late and a Dollar Short?
It’s almost April, and unless you are filing an extension, you are probably getting ready to file your 2018 return. We work hard to educate our clients that if you are just starting your tax planning for last year, you are probably a “day late and a dollar short”, as the expression goes. The most effective planning should happen well before December 31st each year. In fact, this time of year is the best time to do planning for 2019, not 2018. Here are some of the things you want to consider:
If you are no longer working, and pull income from various sources, determine your annual budget for the year and plan how much income is coming from what source. Some people want to save as much tax as they can in the current year, and some are willing to pay a little more now to hopefully pay less over their lifetime. Determine what your goal is and work backward from there to determine from which asset to pull the income. Remember tax isn’t the only thing to consider while doing this. You must also consider performance, liquidity and cost.
If you are a business owner, you need to create a workable budget and an income plan for the business and for your income. We are always amazed when business owners buy things they don’t need just to get a deduction. Don’t let tax savings incentivize you to spend money you don’t need to spend. Further, your tax advisor needs to weigh in on your organization structure and how you are paying compensation to yourself each year. There have been A LOT of changes in the last couple years. Be sure to get a good understanding of them.
Planning how to save your money is as important as planning how to distribute it later. We see many people default to using their retirement plan at work without thinking about what they may need. They may choose the pre-tax option when the Roth would work better (or vice versa). They may choose both because they just don’t know. They may be using their retirement plan more than they should because they may not have enough in other assets or in cash outside of their plan to reach their goals and/or minimize risk. It needs to be planned and reviewed each year.
Working or not working, each year you should consider reviewing the option to do IRA Conversions to Roth IRAs. Conversions are not for everyone, but they should be considered because when they do work, they can be very attractive. Planning these in advance can give you the knowledge to do it at the right time should the market drop quickly and give you time to consider how you will pay the tax cost to convert.
The more you are giving to charity, the more you should do a charitable plan as part of your tax planning. Just as conversions can be most successful when markets are low, charitable giving can be most beneficial when markets are high. In the last few years, people over 70 ½ have been able, with restrictions, to give directly from their IRAs to reduce their Required Minimum Distribution. We have found a lot of success for our clients using the Greater Kansas City Community Foundation. A little thought here can make a big impact for some people.
Planning for college for kids and grandkids for both contributions and distributions should be planned each year. Financial aid, UTMA and 529 deadlines are all impacted by the calendar year. How the money is accumulated and distributed and owned can all affect FAFSA financial aid for students. Integrating this planning into the big picture is not something to do right as taxes are due, but instead at the beginning of the prior year.
Finally, make sure your withholding and quarterly estimates are properly planned to avoid penalties. Whether you are in accumulation mode or distribution mode, you need to make sure your 2019 income is planned so you can both withhold properly and pay those quarterly estimates, if needed. If your income changes through the year making it different from what was planned, you need to alert your tax advisor and planner.
A little good planning throughout the year can make the year-end deadline and April 15th (or October 15th) deadlines not that big of a deal. More importantly, it can save you some money.