Erica is a single mother raising two children, a thirteen year old boy and a fifteen year old girl. She also has a 23 year old son who recently graduated from college and has since moved out of state. Although Erica has a great work-ethic, working two jobs and volunteering at her local food bank one night a week, putting her son through college over the last four years has been a struggle. Because Erica had not saved any money for her son’s college expenses, she was left scrambling at the last minute to come up with thousands of dollars required to cover his tuition and living expenses.
What Erica experienced while trying to put her son through college is not uncommon. Many people fail to plan appropriately for the future. While there is not much that can be done about Erica’s previous lack of preparation, she can take steps to ensure she does not face this same struggle in financing the college education of the younger children. This is where tax planning becomes critical to achieving her financial goals.
Most individuals don’t begin thinking about their taxes until they receive their W-2s. By then it is often too late to implement any type of strategy to significantly reduce their tax liability. As Benjamin Franklin once said, “In this world, nothing can be said to be certain, except death and taxes.” As long as you are breathing and receiving income, taxes are certain to be a part of your life, so why not develop and implement tax avoidance strategies to intentionally build wealth as well as support the next generation?
Understanding how different life events and decisions can influence your tax liability is critical to keeping more of what you make. Going back to Erica’s situation, there are different tax planning strategies she could have employed in order to reduce the difficulties she experienced putting her son through college.
One strategy Erica could have employed would have been to establish a 529 Plan, a tax advantageous plan to help save for college. This would have allowed her to save money for her son’s education while earning tax-exempt interest (as long as money is withdrawn to pay for qualified education expenses).
A second tax planning strategy that could have aided in Erica in her quest to put her son through college would have been to establish a Traditional IRA. While a Traditional IRA is a retirement account, it could prove to be very advantageous in planning for a child to go to college. Not only would this have allowed Erica to begin saving for her retirement, but it also would have allowed her to withdraw the money before she reaches retirement without any type of early withdrawal penalty as long as the money was used to pay for qualified higher education expenses. This type of tax plan becomes even more advantageous for someone looking to lower their tax liability sooner rather than later, as contributions made to a Traditional IRA are not included as part of taxable income. You don’t pay taxes on this money until you withdraw it!
Tax planning is often a forgotten field, as most individuals don’t consider the ramifications of their financial decisions until the first of the year rolls around. By taking the time to map out what you already intend to buy or sell in the coming year, your financial goals for the next three to five years, and your long-term financial goals, you are more enabled to determine the best time to conduct transactions (whether it be the first part of the year, the middle of the year, the last part of the year, or a different year entirely) and how you can reach your short and long term financial goals in a tax advantageous way.
Don’t wait until it’s too late to start thinking about your 2015 taxes! For further information on tax planning or to begin working on your 2015 tax plan, feel free to call Memphis Consulting Group, LLC at 901.791.4643 or follow the contact link at the top of this page.