How To Start Tax Planning Today
How to start tax planning today…
When it comes to tax planning I know a lot of us are just like deer in the headlights. It is hard to read through and decipher all of those tax codes, especially in today's day and age when there are tax laws that seem to be changing every single month! It's definitely hard to keep up with and I know that I find myself on the IRS's website in my spare time just kind of reading through things to make sure that I'm feeling updated. If there's anything that I need to do more research on, I take the time to do that. So today I'd like to just chat a little bit about some ways that we can all do some tax planning for ourselves and to better our future. This is my fourth video in a tax series, so if you haven’t watched the other videos first, do that then come back to this video! :)
I'm going to talk through a few things that could be helpful for us when it comes to tax planning.
Disclaimer this video is meant for entertainment purposes only this is not tax advice this is general info I learned along my way of becoming an entrepreneur so please use this as my opinion please always consult a tax professional for specific advice geared towards your specific situation.
First thing that I really want to talk about is how when we are considering tax planning for the future, we want to make sure that we're doing the best that we can as far as lowering our taxable income and lowering your tax bill, right? I mean no one wants to pay their taxes... sorry IRS but it's just the truth!
Okay so first things first- if you are in a traditional nine-to-five job, then tax planning starts with a W-4. Now when I say W-4 that's the paper you fill out when you first get hired in order to get onto the payroll and to know what deductions that they're going to take. That's what is used to find what your taxable income is- It can vary between workplace to workplace but basically there are tax tables out there at irs.gov that you can look at to see where you are as far as your tax rate is concerned. That's the percentage they're going to use to withhold the money from your paycheck, that goes to the federal government, social security, and your state etc etc. When you look at your paycheck stub at the end of each pay period you would be able to delineate exactly how much was withheld from your paycheck. Why I'm saying this is because there are so many things that go into your traditional paycheck that can actually really help lower your taxable income; for example if your workplace has a 401k or 403b if you're a nonprofit, then you have the ability to contribute pre-tax dollars into that investment account. Sometimes there are workplaces where they do the investments themselves and so whatever money is in there is already kind of designated to a place to be invested after your contribution is made.
Once those contributions have been made, then they do that percentage that I was talking about earlier on your income and then that's what gets withheld for the federal government. So the idea is the more you put away into those tax advantaged accounts the better it is for you when it comes to tax planning because not only is it going to lower your taxable income but it is also going to set you up for a retirement account and that's pretty much your start of your savings plan. That's really where you're going to find the most benefit!
Now when it comes to those who do not have a traditional nine-to-five job and who are self-employed, then we have to do our dirty work, so to speak, so we have to be the one to be proactive at finding those tax advantage accounts and sending money over to those accounts. For the self-employed individual like Mrs. Needs-to-file-her-tax-return, she has a nine-to-five job but she also has self-employment, so if she has the capability to put some additional funds into an IRA account from her self-employed taxes that's really going to set her up for a lot of success down the line. One of the things that I do personally is to automate all of these things. How I do that is when I automate my contribution into my IRA account every month that means it's one less thing that I have to worry about. Now, I do budget for it every month and occasionally it'll change according to how much income I received or vice versa. So for example March of 2021 I received the stimulus and so I put a good chunk of that stimulus over to my IRA account almost right away because it was money that I wasn't planning on and it was money that I didn't budget, so I just went ahead and made that call and made the transfer that way I didn't have to worry about it down the line or so that I didn't get tempted in spending it... so that is the key. :)
We've sidetracked let's get back to the main point:
The main point is when you look at that W-4 for your workplace you want to make sure that you're doing your due diligence with filling that out, asking all the questions that you can, making sure that you're getting the most bang for your buck when it comes to your paycheck. If you are curious down the line if you're withholding enough money from your paycheck the IRS has a very nifty tool called the paycheck checkup. (you can basically walk through that link) It's kind of like a flow-through sort of thing where the IRS says “okay how did you file on your tax return?” “Are you single, married, or married filing jointly”...and that kind of thing and then it walks you through each step of the way to see if you're withholding enough money at the end of the day. When I was at my traditional nine-to-five job a few years ago, this was something I did on a regular basis- I think I was checking in with this paycheck checkup every quarter and making sure that I was contributing as much money as I could to the tax advantaged accounts, they had a 403b at the time, and so I would just put as much money as I could from each paycheck into those tax advantaged accounts so I could get that tax benefit, which set myself up for retirement down the line. The last thing that I want to talk about because I want to make sure that these videos are to the point and they can be easily digestible so I'm not going to go too much into detail for this one. The next point that I wanted to make was that if you have a life event that is going to happen or that has happened I really want to encourage you to do as much research as you can on your own to educate yourself on what the tax implications are for the future. Here's my example for you today, a client recently called up and was wondering why their refund that he was getting was low. In previous years the refund that he got was a few thousand dollars and so he was explaining to me the reason why he was so curious about this is because he had planned to use his refund as a type of savings account for himself. What had changed was his child had passed the mark where he could not claim his child as a dependent not only that but that child was also now in their 20’s making a lot of money each year- it wasn't like it was anything that he could claim as deductions. When it comes to those types of deductions like if you're planning on buying a house, if you're planning on having a kid, or if you're planning on getting married, all of these life events are going to trigger a tax event.
I have a blog post a little bit more in detail about this so i'll link that blog post, but I want to make sure that you're doing your research when it comes to those types of life events. Try to figure out what kind of tax event is going to happen for those life events, how that will affect your income, and how that will affect your taxable income. Do your research and when all is said and done if you are going to be hiring a tax professional to help you out with tax planning to help you out with filing your tax return, I would highly encourage you to still do your research, because we're not all perfect… right? I mean people make mistakes and a tax professional can certainly make a mistake on your return as well, so make sure to do your research, get all your notes and dig into these topics as much as you can so that you can be an informed person regarding your own taxes. Doing your own research will help you so that you're not shocked when it comes to your tax refund being lower than usual because you didn't set yourself up for any kind of tax planning. Make sure that you're doing your tax planning but also as a sidebar to that story that I told you about- I gotta tell you, that's really not a savings plan. A savings plan is something that you're proactive about that you're working towards every month, every paycheck, whatever the case may be. In fact, when it comes to my savings accounts, yes I have more than one! I automate everything- so for my personal accounts my personal checking account automatically deposits money every month on the same day into my personal savings account. The same exact thing happens for my business and the same exact thing happen for my retirement accounts or my my tax advantaged accounts and I do have a high yield savings account right now, and I'm leaving it be because the fed has not changed the interest rates yet so I'm waiting for that to increase, but when that does increase I'm going to go ahead and move some money around and kind of take advantage of that later.
For now what I want to leave you with is: make sure that you create a plan and that you start working towards that plan with every paycheck every month and, check in with your paycheck every quarter; see if the amount of money that you're withholding from your paycheck is going to lend to tax planning down the road. You want to take advantage of as many tax advantaged accounts that you can. That is going to be my general advice to everyone and do your due diligence, do the research, and do everything you can to get all the information at your fingertips. Google is a very powerful thing and we do have the information at our fingertips, and it's just a matter of collecting that data and interpreting it to our own personal situation.
Now if any of this is really confusing to you and you're still curious or you still have questions, remember I do have a service available for an accountant for a day and i would be happy to answer your questions! Share this with someone who could use some help tax planning!
LINKS:
Form W-4: https://www.irs.gov/pub/irs-pdf/fw4.pdf
Paycheck Checkup: https://www.irs.gov/paycheck-checkup Blog Post: https://www.accountingbyedrina.com/bl... Accountant For A Day: https://www.accountingbyedrina.com/ac...
My other tax videos: https://youtube.com/playlist?list=PLH... ____________________________________
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