Most Americans will miss a valuable opportunity this month to save money on next year’s taxes by giving this year’s taxes only half of the attention they should. Preparing a tax return is only part of a successful tax strategy. According to Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®, Americans can use this year’s tax return as a guide to achieving greater future tax savings.
“Americans often only look at whether or not they will receive a tax refund, but most could be more financially secure if they spent tax season looking to the other seventy or so lines of the 1040 for planning ideas and strategies,” says Blayney. “If Americans broadened their focus they could discover savings in their tax returns that go well beyond last year’s refund.”
Tax planning for the future is one of the 12 steps in CFP Board’s year-long “12 for ’12 Approach to Financial Confidence.” Blayney recommends five key strategies Americans can use to manage their cash flow and limit their tax liabilities for the year to come:
- Manage Total Income – Tax payers should consider which of their sources of income are discretionary in terms of timing, amount or taxable nature. For investments, most individuals have some control over when and how much capital gains or losses are realized. Portfolio allocation will also affect the amount of taxable interest and dividends a person has. And until a person reaches the age of 70 ½, he or she has discretion over the amount taken from an IRA.
Taxpayers who will be impacted by rising marginal tax rates and a 3.8% Medicare surtax on investment income in 2013 should consider accelerating income into 2012 by realizing capital gains, converting more income to tax-exempt sources or taking more in an IRA distribution (if no early withdrawal penalty applies) in 2012 and less in 2013. This may also be the year to consider a ROTH conversion.
- Be Aware of Applicable Tax Adjustments – Taxpayers should determine which of the thirteen allowable tax adjustments apply to them. Being familiar with the allowances on the tax return can help citizens keep better expense records during the coming year to fully benefit from these subtractions.
- Time Tax Deductions Appropriately – Deductions that can be accelerated or delayed from one tax year to another are a key area to focus on. For example, a person may wish to postpone charitable deductions or large discretionary medical expenses until next year if he or she expects their tax rate will rise in 2013.
- Increase Certain Taxable Income – Having no or negative taxable income may be a sign that the person is missing an opportunity for recognizing more income with very low tax impacts. Individuals in this scenario for 2012 should consider realizing capital gains, or converting their tax-deferred retirement accounts into a ROTH.
- Lower the Refund to Total Income Ratio – A refund-to-total income ratio higher than 10 percent is an indication that it’s probably time to adjust withholdings or estimated payments to reduce the ratio. If interest rates rise, an even lower ratio should be cause for action. A big refund number is not necessarily a good number. That’s real money that could be used more productively than leaving it interest-free with the IRS.
“A Form 1040 review may leave many uncertain about how to move forward with a new tax plan. A CFP® professional can be a valuable guide and help quantify the benefits of tax-savings strategies – and ensure they make sense for someone’s particular situation,” advises Blayney. “It may be too late for many to reduce their tax liability for 2011, but a CFP® professional can open the door to smart tax planning for years to come.”
12 for ’12 APPROACH TO FINANCIAL CONFIDENCE
In January, CFP Board launched a new initiative called “12 for ’12 Approach to Financial Confidence” where all the components and steps for successful personal financial management are presented, one each month throughout the year including: establishing realistic goals, tax planning, emergency and risk management, investing, retirement, debt management and estate planning.
ABOUT CFP BOARD: The mission of Certified Financial Planner Board of Standards, Inc. is to benefit the public by granting the CFP® certification and upholding it as the recognized standard of excellence for competent and ethical personal financial planning. The Board of Directors, in furthering CFP Board's mission, acts on behalf of the public, CFP® certificants and other stakeholders. CFP Board owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. CFP Board currently authorizes more than 65,000 individuals to use these marks in the United States.
CONTACT: Dan Drummond, Director of Public Relations P: 202-379-2252 M: 202-550-4372 E: ddrummond@CFPBoard.org Twitter: @CFPBoardmedia
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