Archive for January, 2015

The Importance of Tax Planning

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would have allowed her to save money for her son’s education while earning tax-exempt interest (as long as money is withdrawn to pay for qualified education expenses).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.

It is Tax Season…Reduce Your Tax Liability, Legally!!!!

Legally Reducing Your Tax Liability

Author and Criminal Minds stand-in, Morgan McGovern, claimed more than $19,000 in employee business deductions in 2009, all of which were later thrown out by the IRS; these claims included vehicle, travel, cell phone, and meal expenses. Although McGovern was on the right track to reduce her tax liability by keeping up with the deductions that she was entitled to, she failed to maintain adequate records of these expenses. This led to Ms. McGovern not only losing all of her itemized deductions, but also owing the IRS almost $2,000. Ms. McGovern may have failed to legally reduce her tax liability, but that doesn’t mean you can’t still legally reduce yours!

The key to reducing your tax liability is simple: you must either know the tax code very well or know someone who does. While the tax laws are not all that complex, keeping up with all the deductions and/or credits you are entitled to and knowing how to maintain adequate records can sometimes be a challenge. Many people end up paying more in taxes simply because they are unaware that the new business they started is eligible for a start-up cost deduction of up to $5,000 or that those payments made to their non-dependent child to take care of their dependent sibling while they were at work qualifies them to take the dependent care expenses credit.

Nonetheless, perhaps the most commonly forgotten deduction is the itemized deduction. The most recent report by the United States General Accounting Office stated that only 30% of taxpayers choose to itemize their deductions, leading to about 2.2 million taxpayers overpaying their taxes. Although many taxpayers assume that their itemized deductions will not exceed their standard deduction, taking the time to figure up your itemized deductions can be the difference between owing the IRS and receiving a hefty refund.

Knowing the vast number of deductions and/or credits you are eligible to take is the best place to start to reduce your tax liability. However, the work is not finished once you have identified those deductions and credits. This is when knowing how to maintain adequate records becomes important. Look back to the opening story on Morgan McGovern. If she had kept more suitable records detailing the date, location, amount, and business reason or relationship for her expenses, she would have been able to reduce her tax liability significantly. Regardless of how deserving you may be of the deduction and/or credit you are seeking to take, if your records are not sufficient enough to support your expenditures, you will not be allowed to take them!

Remember, reducing your tax liability is not complicated. It merely takes a high-level knowledge of the tax code. Knowing what deductions and credits you are entitled to and how to keep the appropriate records for such deductions and credits is a great start. Keep in mind that every situation is different; just because Angela from across the street, who may have a situation similar to your own, takes a certain credit, does not mean you will be able to. If you are unsure about whether or not a deduction or credit applies to you or how to adequately maintain records, we highly recommend that you seek the advice of a professional tax preparer.

To schedule a free tax consultation with Memphis Consulting Group, LLC please call 901.791.4643 or go to memphisconsultinggroup.com/contact-memphis-consulting-group.