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Michael Green: The time for tax planning is now

Tax Time

Posted: December 15, 2010 5:59 p.m.
Updated: December 16, 2010 4:55 a.m.
 

The time for tax planning is now. The Internal Revenue Code, Title 26 of U.S. Code, consists of more than 3,500 pages, and the regulations that interpret the code number thousands of additional pages. A good tax professional can help you comply with all regulations while ensuring that you get all the credits and deductions to which you’re entitled for both state and federal taxes — and assist you with tax planning for the future.

Most people find out how certain financial decisions impact their taxes as their tax return is being prepared. At that point, it is too late, and the financial impact is often significant. Tax planning is often ignored, but it is critical to your financial health.

Life events that call for assessing your tax situation are too many to list here, but here are a few:

- Marriage or divorce
- Birth of a child
- Home purchase
- Child entering or graduating college
- Retirement
- Business startup
- Second job or income

For example, Sandy and Tom are retired, and they were relying on their 401(k) to support their lifestyle. With the negative results of the stock market, they were forced to generate additional income.

Before launching into something, Sandy and Tom needed to understand the overall financial impact of that decision. Just a few pitfalls  could  impact their Social Security benefits, reduced itemized deductions and potential self-employment taxes.

Rick and Sheryl have a daughter Karen, who is a full-time student in college. As with most college students, she needs spending money and is working part-time. On the surface, it appears simple and straightforward.

However, it may impact Rick and Sheryl if they continue to claim Karen as a dependent. How does it impact Karen’s scholarships and financial aid? Does Rick and Sheryl’s income exceed any limits that minimize tax benefits?

Harley always wanted to be self-employed so he started selling pet supplies online. Harley had a pretty good first year, but was shocked at tax time due to some costly, yet all-too-common mistakes.

Someone once said, “My biggest fear is not knowing what I don’t know.”

Some things to consider are: clearly separate a business from a hobby; whether your business should be a sole proprietorship, limited liability corporation or other type of entity; proper record keeping; and expenses that are deductible versus nondeductible.

These are just three of the countless scenarios that could affect your tax situation adversely. With just a month left in 2010, if you haven’t planned for tax season, there’s still time for you to evaluate your tax situation. What changed in 2010 from 2009? Have you earned non-W2 income? Has a spouse started working? Did anyone obtain a second job? Did you take an early withdrawal from an IRA or 401(k)?

As you begin the tax-planning process, who you choose to do your tax return and manage your finances is crucial to your planning process.  

Unfortunately, it’s not always easy to identify a good tax professional — and it’s important to note that although a paid preparer will sign the return, you are responsible for the accuracy of the document.

Avoid tax preparers who “guarantee” a larger refund than other tax professionals, or who offer to base their fee on a percentage of your refund. No ethical tax pro would promise any more than to help ensure that you pay only the taxes you owe.

Ask questions; get references. A good tax preparer has nothing to hide. The next two items are questions you should be asking your tax professional.

“Can you represent me before the IRS in all matters, including audits, collection actions and appeals?”

“Do you belong to a professional association with a specific code of ethics and rules of professional responsibility and required education credits for membership?”

Michael Green of Michael L. Green Tax and Financial is an enrolled agent and certified financial planner in Valencia. His column reflects his own views and not necessarily those of The Signal. Green can be reached by calling (661) 257-4111 or www.mgreentax.com/index.htm

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