Helping Tax Payers Reduce Their Tax Burden for Tax Year 1998

April 15, 1998

TAX PLANNING

Planning is the key to successfully and legally reducing your tax liability. In order to make an effective tax plan you must have an accurate picture of your tax situation. The outlook for the following year is equally as important as the current year. Although you do not have to be a tax technician, it is important to understand some basic principles in order to accomplish your planning objectives.

 

Step One: Determine Your Taxable Income

Mid-year is a perfect time to "tax plan." Why? A major portion of tax planning is to "annualize" your income. The simplest method of annualizing your income at mid-year is to multiply your year-to-date income through June 30^th (6 months) by two to estimate your twelve month income.

For example: If your year-to-date check stub through June 30, shows that you have earned $25,000, you can estimate your earnings for the year will be $50,000 ($25,000 x 2). You should of course adjust this estimate for any anticipated changes such as a year-end bonus, an anticipated reduction in salary, the anticipated realization of a capital gain or loss, or any amounts to be carried forward from prior tax years.

Another example: If your year-to-date check stub through September 30, shows that you have earned $37,500, you can estimate your earnings for the year will be $50,000 ($37,5000 * 1.33).

The key to remember: You are not trying to calculate anything more than a reasonable estimate. While not exact, it is better than "closing your eyes, and hoping everything will turn out "okay."

Step Two: Estimate Your Allowable Deductions

A good place to start is with your Schedule A itemized deductions. The primary itemized deductions are state and local income taxes, mortgage interest, real estate taxes, charitable contributions, and a series of miscellaneous deductions such as unreimbursed business expenses and investment expenses. These types of miscellaneous deductions must exceed 2% of your adjusted gross income (AGI).

If you do not itemize your deductions, use the standard deductions for the current year.

Qualifying for deductions is a critical phase of tax planning. Don’t allow yourself to be surprised when preparing your tax returns next year to find out deductions you thought you would have, are not available.

Keep in mind allowable deductions are deductible only in the year paid. If you pay by check, date and mail the check before year-end, pay by credit card, or finance your expenses with a bank loan you can deduct those expenses in that year. Giving a service provider such as a physician an IOU will not make the deduction qualify. Payments on an IOU are deductible only when paid, not when the IOU is issued.

An excellent way to estimate your legitimate deductions is to review your prior year’s tax return and, of course, make adjustments where necessary. Did you buy a home or refinance a mortgage this year? Are you planning to increase your charitable contributions? Did you move to a state with either higher or lower income taxes? Do you expect higher medical expenses? All of these items must be taken into consideration.

Step Three: Dependent Exemptions and Filing Status

Another area of concern when estimating taxable income is personal and dependent exemptions and filing status. Did you or will you get married or divorced? Will you have additional children before December 31^st? Will you lose an exemption because of age, income, or change of marital status of a dependent.

 

Step Four: Compare Withholding with your

Estimated Tax Liability

A major factor in tax planning is to estimate your current year’s tax liability and compare it with your Federal Income Tax withholding or your estimated tax payments. The goal for this exercise is "no April surprises."

Your goal is to complete your tax return with no money due to the IRS and no refund due from them.

 

The Truth About Tax Refunds

When you receive an income tax refund, in essence, you have given the government an interest free loan. A large refund usually indicates poor tax planning rather than good tax planning.

 

Call Pape Financial Services, Inc.

We are currently offering a free initial tax planning session for this tax year. It is never too early to begin thinking about your tax strategy. Call us at 847.455.9500 or fill out our contact form.

9729 W. Grand Ave. ~Franklin Park~IL~60131~USA
Tel: 847.455.9500~Fax: 847.455.9501

Please fill out our contact form with questions or comments about this web site.
Last modified: May 12, 2003