The 2022 tax season is wrapping up with the extended tax return deadline on October 16 and just the November 15 deadline for non-profit organizations to get past so what better time to look at tax savings ideas to implement before the year is over.
We see a lot of tax returns across a year, some simple, some not, and many that could have paid less in tax or gotten larger refunds if they had made different choices.
Remember that the more tax savings you can find, the more cash that frees up to redirect to your retirement savings which your future self will thank you for. Don’t forget that I’m here to help with that retirement planning too.
Consistently we see these three items as being missed tax deductions, some of them repeated year after year.
- Missed opportunity for retirement plan contributions
- Poor recordkeeping
- Minimal tax knowledge
Retirement Plan Contributions
A surprisingly large number of people are not aware of how and when they can make contributions to retirement plans.
At the individual level are the Traditional and Roth IRAs and if you work for a company then a plan such as a 401K or 403b are common.
But if you are self employed or a small business owner you can also usually contribute to a self-employed retirement plan of some type which comes as a surprise when I tell them or ask them if they contributed to a self-employed plan.
That very often leads to a person would like to contribute to such a plan so they can get a tax deduction for essentially paying themselves in the future, but they didn’t plan ahead and now as they approach the tax filing deadline they don’t have enough funds to make both a meaningful size contribution and pay the taxes they owe at the same time.
Solution – don’t wait until tax time to start and open your retirement plan and even fund it to a certain degree during the year.
You may not know the full amount of contribution that you could make until the tax return is final, but if for example your income is consistently such that you make up to $20,000 per year in contributions, then starting a plan and funding it before year end with $10,000 of contributions gets you part way there and spreads out your cash outflows so you aren’t in a position at tax time of very large outflows for both contribution and paying tax owed.
Let’s set up a call soon to talk through this whether you are already participating in a plan or have wanted to start one but didn’t know where to start.
Probably the single most cause of missed tax deductions and therefore overpayment of taxes and therefore less money to set aside for retirement is poor recordkeeping.
This takes so many forms I can’t even cover them all in this article but ranges from W2 wage earners who miss out on deductions for charity, for medical, for college tuition costs and the list goes on.
For those that might own rental property did you keep an accurate record of all the deductible expenses?
Most especially for those that are small business owners or self-employed “SBSE” that have lots of possible deductions, meals, home business use, vehicle expenses and the list goes on.
Very often I’ll see someone with some expenses in one spreadsheet, some in another spreadsheet, some in maybe a QuickBooks or Quicken file, but rarely is it all pulled together into one consolidated system.
That significantly increases the likelihood of missed deductions, or even worse duplicate deductions because when you get audited and you pull out this birds nest of information to give to an auditor as your supporting documentation it won’t go well for you.
Missed tax deductions are what I usually call a permanent missed opportunity. Rarely does one go back to a prior year and redo their records to look for missed deductions, they take the hit, say they’ll do better next year and next year comes and it’s the same situation. Best of intentions but life gets in the way.
The only way to break that cycle is to break that cycle. You need to get a formal system in place and use it regularly, not wait until the middle of March when you see a headline article that the filing deadline is only a month away. Too late most times.
So my preference is for QuickBooks as the record keeping system. Online or desktop version, pros and cons to both which we won’t get into here. Good alternatives are Quicken, I’ve seen but not endorsing Wave.
If you really really insist on not having a formal system I do have an Excel workbook system for SBSE folks and rental property owners.
If you are my client you’ve most likely seen it and know that it works.
If you’re not my client and don’t have a system or your tax preparer isn’t giving you one, then you need to talk to them about that or make the decision its finally time to have your retirement planning and tax planning with the same person, me.
Basic Tax Knowledge
The tax code is supposedly 80,000 pages long so where to start? You don’t need to learn it all, but you should be aware of issues that affect your personal and company return.
I freely acknowledge I do not know all 80,000 pages, but the areas I do know I think in all modesty I know very well and if I get asked about an area I’m not as familiar with I’ll be upfront and tell you that. If it’s something I want to add to my base of knowledge I’ll go research it or if it’s not I’ll try to find a resource for you.
If it’s too exotic (i.e. questionable) you’re probably on your own. I’ve had more than one person tell me they read in a book that if they did such and such they never have to pay tax again. They want someone to work with on that and I tell them to keep looking.
Or they saw some talking head on social media giving questionable financial advice so they sound important and get more viewers but they won’t be there when you get audited for following their advice. Not playing those games.
But basic tax knowledge is something every tax paying citizen should have a working knowledge of. Sadly, it’s not taught in schools. You had to learn about parallelograms and pass that on a test but no one taught you the difference between a tax deduction and a tax credit so take that up with the politicians and DOE.
But understanding how taxable income flows into your tax return, how deductions lower that taxable income and then how the tax is calculated to arrive at your tax liability is crucial to controlling your life time tax expense and remember that income taxes are one of your largest lifetime expenses.
Look at your 2022 Tax return Form 1040, Page 2 Line 24 Total Tax.
Multiply that by the number of years you expect to work until retirement and see how much that is.
Then cut that 2022 tax amount in half and multiply that by the number of years you hope to live in retirement. Add those two large amounts together.
Those two amounts are almost guaranteed to be six figure amounts and a very rough approximation of how much tax you will be paying for the rest of your life. That amount should concern you.
So - get some basic tax knowledge to try and minimize that tax. There are a myriad of resources out there. Some great, some super technical, some free, some you pay for. Or just live with paying that tax.
I’ll admit I’m biased but I think a good starting point is here for some simple high-level topics to consider.
Action items – if you want change, then you need to do something different than before.
Contact me and let’s get that SBSE plan started before year end. Or if you have a plan with an employer and wonder how it all works lets set up an introductory call to look at your overall retirement plan process.
If you don’t have a good recordkeeping plan in place, get one started now. If you are a client and don’t want to wait until my system normally comes out in January for tax season work then contact me about getting started on this year while it’s still this year.
Tax understanding – read past articles, subscribe to websites like https://www.360financialliteracy.org/ sponsored by the AICPA, take a class, pay for consultation time. If you are a business owner its most likely even a tax deduction expense.
I have done consultation type tax education classes for SBSE in the past. Not free, but more than worth the cost in newfound tax deductions or avoiding penalties.
And – I’m kicking around the idea for a book on SBSE issues since so many people tell me after I helped them solve a problem that they wished someone had written a book on it. So I’m considering that and open to thoughts and input if you want to send me any. That way I’ll also know you made it to the end of this long article.
The information in this and other articles is intended to be educational in nature only. Not tax, legal or investment guidance for you specifically. Each person’s situation is unique and you must seek appropriate professional guidance that can address your unique situation.