Three Important Tax Planning Tips for the Month of January
As you begin to gather the financial information necessary to prepare and submit your 2011 tax returns, it is wise to look carefully at the financial events and strategies of the past year for the purpose of evaluating what impact they have had on the taxes you owe. Listed below are three areas of tax planning that should be examined during the month of January.
1. Evaluate the possibility of an increased tax liability.
Review the financial events and circumstances of 2011 to determine whether there has been some change or occurrence that might result in an increased tax liability for the year. If this is the case, plan ahead for the increased tax burden you may be facing. With this proactive approach, you will not be caught off guard in April and unable to pay the taxes you owe. The following is a list of some common financial events that often result in an increased tax liability:
- The foreclosure of a home
- The write-off of a debt
- The receipt of unemployment benefits where no tax was withheld
- The receipt of an year-end bonus where no tax was withheld
- The distribution of funds from a 401(k) plan or an IRA
- The realization of a capital gain resulting from the sale of securities
- The realization of a profit from the sale of a business or an investment property
2. Evaluate your wage withholding choices and estimated tax payments.
If you have overpaid your taxes in 2011, examine and adjust your wage withholding and/or estimated tax payments for 2012. When you overpay income taxes, you are actually giving the government an interest free loan for a period of time that begins when the money is collected from your paycheck or other source and only ends when a tax refund is issued. Although getting a large tax refund check can seem like a good thing at the time you receive it, giving the government free use of money you could otherwise be investing or putting to personal use is not a wise financial decision.
3. Evaluate the structure of your small business.
If you own a small business, evaluate how the existing business structure has impacted the taxes you owe for the year. Because tax law as it applies to small businesses is so complex, it is often worthwhile to enlist the services of a qualified tax professional to perform such an evaluation. Such an individual will know how to assess the tax advantages and advantages of the various business entities and to make a recommendation as to which one is the best fit for your particular business. There are numerous types of business entities and, although tax planning is not the only thing to take into account when structuring the business, it is one of the most important factors to consider.