Plan forward to pay the right amount of taxes
You've all heard the advice about how to manage your tax return in a given tax year -- contribute the maximum to your IRA, don't overpay on your quarterly pre-payments, and so on...
On the surface, these moves are fine because they reduce the amount you may owe the IRS that year. But too often, tax return preparation is based on looking back -- based on what you earned, what you donated, and how your assets shifted -- over a short period. Intelligent tax planning is about looking forward, considering how moves you make today will affect not only your tax bill this April, but also your total assets years from now.
Having worked with hundreds of wealthy clients over the past twenty years, I marvel at how little prospective income or estate tax planning had been done prior to our getting together. Too much of their “tax thinking” was simply reactive from last year’s return. It is amazing to see how few folks actually are taking full advantage of the laws available to pay the right amount of tax each year.
When I say “right” amount of tax, most people think I mean the least and often that is the case. However, sometimes it makes sense to pay more than the least amount possible in one year to provide future savings. An example would be when one thinks marginal tax rates may increase, perhaps they may recognize more income in the current year through a larger IRA withdrawal than is necessary. That way the total taxes paid over the next few years is the least amount. (More on this later.)
Regardless, if you’re not mapping out the next five years in your tax thinking, perhaps you will benefit from staying tuned to SYTB.