Ah, taxes. Except for certified public accountants (CPAs) and masochists, nobody enjoys thinking about taxes. But shoving your head in the sand and just doing the bare minimum to be compliant isn’t going to reap the financial rewards of true tax efficiency. As you build your wealth, tax considerations are going to become more important in protecting your earnings and staying in good standing with tax authorities.
Here’s what you need to consider and prioritize as you progress in your financial journey.
Tax preparer vs tax planner
For individuals with modest incomes or finances that are relatively straightforward, it makes sense to prepare your own tax returns. After a certain point of complexity, however, you’re going to want to find a CPA to get you the most accurate tax return and help ensure that deductions are taken in the most advantageous way possible.
The problem arises when you assume that just because you have a CPA preparing your return, tax strategy is included in the service. As a general rule, the job of a tax preparer is to submit an accurate tax return. They may offer advice here or there — such as a suggestion to create an S-corp rather than running all business income through a Schedule C — but a comprehensive tax plan is rarely included with an annual filing.
If you want someone to truly dive into your business and personal finances and see what changes you need to make for impactful, long-term tax advantages, you’re going to need to specifically engage with a professional for tax planning services . These tax experts can range in qualifications from CPAs to tax attorneys to certified tax planners.
When choosing a tax advisor, it’s important to be picky. There are a lot of shady individuals in the industry who will happily cross the line from aggressive tax strategy to blatantly illegal actions. Asking for referrals among like-minded business peers is a good place to start. After that, make sure to interview your potential choices and make sure they are willing to back their tax strategies with documentation of supporting tax code and representation in court if strategies are ever called into question by government agencies.
And when selecting a tax planner, be prepared for sticker shock. For high-dollar individuals and businesses, tax planning services can easily run into the tens of thousands of dollars every year.
However, if that tax planner ends up identifying a state film credit, a regional opportunity zone and a way to minimize self-employment taxes through business entity reclassification, the seemingly outrageous fee can easily pay for itself several times over. So before you get offended at the fee schedule, consider whether the return on investment (ROI) might be worth it.
Kiplinger Advisor Collective is the premier criteria-based professional organization for personal finance advisors, managers, and executives. Learn more >
Get your processes in order for next year
If it seems like every tax filing season is a mad scramble to find documentation from the prior year, your processes need an overhaul. And if you wait until tax season to assess those processes, you’re already behind. After all, you’re likely several months into the current year when putting together tax information for the prior year.
Tax documentation procedures should ideally be assessed and updated no later than two or three months before the end of the prior fiscal year. That allows you to start fresh with a complete tax year of the same, planned procedures.
Some things to consider might include incorporating deadlines and technology into your tax year. Rather than backdating mileage logs, select and utilize a mileage tracking app on your phone beginning on day one of the tax year. If you keep track of your own business accounting, you should set monthly or quarterly reconciling deadlines rather than trying to clean up a year’s worth of internal finances after the year is over.
If you have strong procedures in place and you follow them, the improvement in time efficiency is massive. Also, if your finances are ever scrutinized by federal or state tax authorities, backdating information in one massive chunk gives the impression that you may have used falsified or fabricated information after the fact.
Keeping your records up to date demonstrates an intent of honesty. So even if you end up making some unintentional record-keeping errors, authorities are going to be less suspicious of willful dishonesty, which can save you massive penalties.
Support your wealth with good tax practices
For someone whose tax returns consist of a single W-2 and a mortgage interest amount, tax strategy considerations are going to be minimal. However, for those with investments, extensive assets or businesses, strategies for tax savings and documentation efficiency can have a substantial impact on overall wealth. So, as you advance your personal wealth, make sure your processes and trusted advisors are robust enough to support it.
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