Every year I witness the same thing happen when it comes around to income tax time. People begin scurrying like little mice looking for all of their documents, get them to their tax person, and then begin the small holy prayer hoping that their accountant can get them a refund.  It’s like some bad game of dungeons and dragons, and with a roll of the 20 sided dice you win the game if you lucky number comes up on April 15th.  After the 15th, you are close to a third of the way done with the year, and then can put away your documents until the dreaded tax season hits a year from now. Right?

Wrong! The number one personal finance mistake when it comes to income taxes is the focus of preparation of income taxes in the first quarter of the year when it should be planning on how you are going to reduce overall tax liability for that calendar year.  Since most CPA’s are focused during this busy season, they generally spend very little time helping you plan out the reduction of taxes for the year.  Instead, they are focused on putting together these neat little binders with lots of forms knowing that if you get a refund you’ll think that a great job was done for the prior calendar tax year. Since tax planning begins with the end in mind, here are some key things you’ll want to be doing now to manage you taxes for 2011.

• Review Your Withholdings Or Estimated Taxes - Remember that your tax bill is a function of your filing status and ultimately your overall net taxable income. Whether you owe or get a refund is truly a function of whether you withheld too much money during the calendar year or too little money during the calendar year. I am amazed that hardly anybody reviews these withholdings (or estimated taxes) so you can plan as best as possible to get your overall number of owing or getting a refund as close to zero as possible.  You should adjust this in the beginning of the year, and then have your CPA or accountant revisit this around June 30th to see if you are on track or need to make any changes to the game plan.  Come tax time, you should not have surprises as to whether you owe money or will get a large refund.

• Review All Pre-Tax Deductions - There are a handful of tax strategies where you can use pre-tax dollars that will lower your overall tax liability.  Based upon your overall cash flow, you should review your 401(k) contributions you can afford during the year.  You may be part of a Flexible Spending Account or Health Savings Account, and should really figure out what you can put away pre-tax that you will use during the year.  If you have the Health Savings Account, you should see if you can max out your contributions to lower your overall taxable income.  You may have other opportunity to buy things like disability insurance pre-tax out of your paycheck.  Last, if you own a business, there is a multitude of tax deductions that can be taken dependent on the structure of the business.

• Review Tax Credits – There are many different types of tax credit programs that exist from both a state and a federal level.  Doing some investigation about whether you qualify for these credits, or what income level would make you allowed to qualify for these tax credits is critical to look at in the beginning of the year. If you are a higher wage/income earner, there are investment tax credits that you will want to look closely at in the beginning of the year that could lower your overall tax liability for the year ahead.  Sometimes, these tax credits are less effective if you buy them at the end of the year versus the beginning of the year.

• Review Your Documentation System - Whether you still have the shoebox system or you use a program like Neat Receipts, documentation is key.  Since employers are reimbursing for less and less for expenses these days, keeping really good track of your unreimbursed employee expenses will be critical come tax time.  In addition, you should fully review what expenses can be tax deductible with your accountant or CPA, as many of them won’t spend time showing you what could be deductible because this is their busy time. Make sure you itemize out your non-cash charitable contributions and have receipts for your cash contributions. If you have a side or full time business, be certain that your personal and business expenses are not commingled. Having separate bank and credit card accounts will allow for the separation of church and state that you need to show what is a personal expense and what is a business expense.

The last thing I recommend is to look out at the year ahead and see what changes may affect your overall tax situation.  Are you getting married?  Will you have a new addition to the family?  Are you finalizing a divorce?  Are you starting or stopping a business?  Is there a major purchase you are going to make?  Will you be changing jobs? By sitting down with your financial advisor or CPA and having this dialogue, you can put a strategic game plan into place for 2011. I know with almost 20 years of doing this business that those who plan end up doing far better than those who wait until they file their taxes to see how the story turns out. At the end of the day, tax planning and tax preparation are two very distinct things.  The smart money move for tax management 101 is to plan early and often.  Add A Comment

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Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®

Co-CEO and Founder oXYGen Financial, Inc.

oXYGen Financial, Inc. co-CEO Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice and Smart Money Moves to the X and Y Generation.

Phone 1.800.355.9318 or 770.777.0427

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