Tax Planning Isn’t Rocket Science, But it Can Save You Money!

Tax planning can save you money.

You don’t have to be a rocket scientist to do a little planning ahead to save big dollars on your tax return.

Today I want to talk about tax planning, and  why it’s so important.


I recently got a call from a woman who wanted to take $30,000 out of her IRA to buy something special.  She went to her financial planner to take the money out and he told her that she needed to take another $7500 out just to cover her taxes, but to talk to a tax person first.  So she called me.


Well, I ran the numbers for her and if she took $37,500 out of her IRA , it was going to cost her over $9,000 in state and federal taxes combined.  Even though she would be withholding $7500 for her federal taxes, she’d still have to come up with another $2000 to be whole.  Then we started talking.


You see, she didn’t need to make the purchase right away, she was just thinking about it.  So I decided to see what would happen if we split the $30,000  between 2013 and 2014, $15,000 each year.  What a difference!  Instead of paying over $9000, she’ pay $688 per year total for her state and federal income  taxes combined.  That wasn’t a typo–six hundred and eighty-eight dollars a year.  $1376 total tax for a savings of over $8000!


So by waiting for another 60 days to take half the money she wanted out of her IRA she’d save $8000.  How cool is that?


In fairness, the woman’s particular situation just put her into a sweet zone for this to work out so well.  For many people, splitting up the IRA withdrawal  would not save them any taxes at all.  But my point is–how do you know?   By taking the time to ask–she saved $8000.


What’s going on in your life that could benefit from a little tax planning?  Selling some stocks or mutual funds?  Donating to charity?  Do you own a small
business?   Are you getting married?  Getting divorced?  Having a baby?  Getting a new job?  Buying a home?  Any of these events, and many more, could use
a little tax planning.


My business card says, “If you don’t have a tax strategy, you’re probably paying too much.”    It’s true.  So often in my job, I’m trying to help people who’ve already made decisions and come to me when its’ too late to make changes.  Why would you want to give the IRS more money then you need to?  It’s not rocket science, it’s just common sense.   The best way to keep more of your money is to make a plan for keeping it.  Call me.  I can help.

The 2% Payroll Tax Cut

Capital Hill

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Do you make over $110,100 per year? If so, then you need to read and understand this.

That 2% payroll tax cut that Congress extended for January and February – did you know that if you make over $18,350 for those two months that you will have to pay back a 2% surcharge on that income next year at tax time?

Now I keep hearing, “Don’t worry, Congress will fix that.” But let’s get realistic – how often can you count on Congress to “fix” anything these days?

I think the biggest problem is that this got passed and most people don’t have a clue that they could have a very real problem when they file their taxes next year.

Let me give you an example. Let’s say that Fred Taxpayer earns $250,000 a year in W2 wages from his law firm. That works out to $41,667 for the 2 month period. 41,667 minus 18,350 equals $23,317. Fred is going to be taxed an extra 2% on that $23,317. Fred can’t take any deductions to write off against this tax, no tax credits or offsets. It’s just a straight 2% on the $23,317.

Now I hear what some of you are saying – that’s only $466 and if Fred already makes $250,000 a year you’re not feeling too sorry for him. The point is that it’s a stealth tax, shoved under the rug and not discussed openly. Surprise, Fred! Here’s an extra $466 you have to spend on taxes that no one told you about.

But for some folks, it’s even worse. Let’s say Fred gets his annual bonus in January. Fred did a really good job and got a $50,000 bonus from the firm. There’s another $1000 added to Fred’s tax bill. Remember, there are no deductions or tax credits to offset this tax. And, this is tax money that is in addition to the regular income tax he’s already going to have to pay.

If you’re a high wage earner, be aware that this is happening. Put the extra 2% that you’re theoretically saving and plug it into a savings account because you’ll have to pay part of it back later.

Oh, and for what it’s worth, the rank and file House and Senate salary is $174,000 a year. That means they’ll pay an extra $213. Most members of Congress don’t prepare their own taxes because “our tax system is too complicated.” I wouldn’t be surprised if some of them don’t even realize that they voted for this.

If you’d like something to back up my story, here’s a link to the IRS website outlining the new rules:,,id=251650,00.html

Tax Tips for High Income Earners

Luxury Tax

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Perhaps I should subtitle this: Who Are All These Rich People Who Don’t Pay Any Taxes and How Come I’m Not One of Them?

It’s frustrating isn’t it? You work hard for your money, you’re taxed at 28-35% federally, plus your state tax, real estate tax, sales tax, etc., and then you hear on the news about all these rich people who don’t pay enough in taxes. Makes you want to scream, doesn’t it? And I haven’t even mentioned AMT yet!

As a wage earner, you’re kind of stuck (The rich people with really low income tax rates aren’t wage earners like you, but I’m guessing you knew that anyway.) You’re going to receive a W-2 that reports your income and – let’s face it – it is what it is. But that’s a good thing, be glad you have a job that earns you good money. But the goal here is find ways to reduce that taxable income.

Easy one first: max out your 401(k) plan. This one is so basic I wouldn’t even think to say it, but I’m shocked and amazed by the number of high income wage earners who don’t do this. Those of you who work for companies where you get kicked out of the plan because not enough lower income employees participate are exempt from this scolding-that’s a whole other problem that I don’t have a cure for. But if you’re making enough money to be reading this post, then you need to maximize your 401(k) contributions. For 2013 and 2014, the maximum amount you can defer is $17,500. (If you’re in the 33% tax bracket, then that’s over $5,000 in tax savings!) If you’re over 50, you may defer $23,000.

Cafeteria plans: These are those other services that you can set aside money for—tax free, to be used later to pay for health care or child care expenses. Some companies have a huge selection of these benefits, but health and child care are the two most common ones. There’s a hitch with cafeteria plans though, it’s use it or lose it so don’t put aside more money than you intend to spend.

People often ask about the tax credit they can get from paying for day care service and don’t they lose the credit if they pay for day care through their work. That’s true. But look at the reality—at your income, the best you’re going to get in a tax credit is 20% of what you spent on daycare. By paying your child care expenses out of your cafeteria plan, you’re saving whatever your tax rate is so you’re better off. Any child care money that wouldn’t qualify for the child tax credit will be regular taxable income to you.

As a high income earner, you’ve probably already met my not-so-good friend Mr. Alternative Minimum Tax. The AMT winds up costing you many of the deductions that other taxpayers usually claim, but this is a tip that’s important for you to know. While the AMT may eat away many of the deductions that you could have claimed on your Schedule A form, it’s still a good idea to do the paperwork anyway. Depending upon what state you live in, you can often claim your itemized deductions in your state even though they were lost on your federal return. Not all states do this and you might need to play around to see what works best for you.

For example: here in Missouri, you can’t claim a deduction for your state income tax paid, but if you substitute state sales taxes paid on your schedule A then that’s still a deduction. For most people, state income taxes paid is a much bigger deduction than state sales tax. But if you’re dealing with AMT then claiming the lower state tax amount paid doesn’t change your federal taxes—you’ve still got the same tax liability either way. So, in Missouri you’ll want to claim the sales tax rate instead of income tax so that you get the larger deduction on your Missouri state taxes. Also, by doing this it makes your state refund not taxable for next year, and let’s face it, you don’t need any more taxable income.
Many of the tax programs give you updates on how an item on your tax return affects your federal taxes. If you’ve played around with this you’ve probably given up claiming certain deductions, (like state income tax and employee business expenses.) But make sure that you check the value that these deductions have on your state return, you don’t want to miss out on anything that you can possible claim.