The Cost of Waiting Until April To Think About Taxes
JEANNE PYLE SCOTT, DIRECTOR, CPA, CTFA, CGMA
CENTENNIAL TAX & ACCOUNTING
For many, tax planning often begins when tax documents start arriving in the mailbox. Unfortunately, by April, many of the most effective tax-saving opportunities have already passed.
Tax preparation looks backward – it considers only what has already happened. Tax planning looks forward. The difference can have a meaningful impact on your financial future.
Consider a retiree deciding which accounts to draw from for income. Waiting until tax season may reveal a higher-than-expected tax bill, but proactive planning during the year can help manage taxable income, reduce taxes on Social Security benefits, and potentially avoid higher Medicare premiums.
Similarly, investors who review their portfolios throughout the year may have opportunities to harvest losses, manage capital gains, or make strategic charitable gifts before year-end deadlines.
For an employee receiving a year-end bonus or other incentive compensation, waiting until tax season may result in an unexpected and material underpayment of taxes. Most employees assume that because the bonus runs through payroll that their employer is correctly accounting for the tax due on the income. However, regulatory limits on withholding for lump-sum payments often result in withholding that is substantially lower than your actual tax rate leaving you with a large balance due in the spring.
The good news is that tax planning does not require major changes. Often, a periodic review of income sources, investments, charitable goals, and estate planning strategies can identify opportunities to keep more of what you’ve earned. Rather than viewing taxes as a once-a-year event, consider making them part of your ongoing financial plan. The most valuable tax strategy is often not the one discovered in April, but the one implemented long before the year ends.