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Make tax planning a part of your retirement strategy

3 min read
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At this time of year, many people are relieved income tax season is over Many people collect their tax documents at the beginning of the year and take them to their preparer, who has limited options to generate a tax return that requires you to pay the minimum amount possible. They work with your history of what you did the year before. This is planning for taxes reactively.

You make the decisions during the new year that decide how much you must pay. So how can you be proactive to pay as little as legally possible? Plan and keep better records. If you have business expenses, document them, the date purchased and why they were purchased.

Many people miss legitimate expenses. Keep track of your mileage for business uses. While you can deduct auto expenses that are business related – things like fuel costs and tolls – it may be more advantageous to you to keep track of mileage. You may be able to deduct at 54 cents per mile, which could be a lot more valuable than individual expenses. You can’t get both, but mileage gives you some credit for depreciation.

If you do volunteer work, you may be able to deduct mileage if you itemize on your tax return. You may be able to get a deduction for things that you donate to charity. If you are over 70-½ and do not need to spend your required minimum distributions, you may be able to assign your RMDs directly to a qualified charity. Doing this could save you taxes if done correctly.

You do not get a deduction on your return, but you do not have to recognize the income either. This satisfies your required minimum distributions. Contact a qualified tax preparer in advance if you are considering this option.

Proactive tax planning depends on your needs for the funds and the type of tax structure the investment is in. There are three types of assets as far as the government is concerned: qualified, nonqualified and Roth. Tax planning is most effective with qualified funds. These are IRA, 401(k)s and other such assets. Uncle Sam is your partner, because you owe taxes when this money is withdrawn. If you will need to use this money during your lifetime, have a plan to bump the bracket and “detaxify” these funds at the lowest rate possible. This will minimize your taxes.

If your are not going to need these funds, have a plan to stretch your qualified money. This might allow you to take advantage of tax deferral and leave more to your beneficiaries. All of this requires advanced planning. Many people only have a plan for investments, not an overall financial plan that includes tax planning. Remember, it is not how much you make, it’s how much you get to keep.

Gary Boatman is a Monessen-based certified financial planner and author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, contact business editor Michael Bradwell at mbradwell@observer-reporter.com.

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