Tax season is upon us again. A two and a half month period where Americans everywhere sift through tax documents, receipts and investment reports in hopes that they can file an accurate tax return and stay in the good graces of the IRS.

The real goal for many people is simply to get the largest refund that they can (within the laws, of course). While receiving a refund is great news and may feel like finding money in an old pair of jeans, should that really be your goal?

I would argue that we change our definition of success in filing our tax returns and instead of shooting for the largest refund, aim instead at paying the optimal amount of tax for your specific financial situation.

Although for each person this may have a different meaning, the process for this, what we call Tax Planning, is the same.

Step 1 — Tax Planning begins by taking a proactive look at your tax situation to assess what tax bracket you’re in, what deductions and credits you’re receiving or missing out on, and what income sources and assets are impacting your return and why.

Step 2 — Next, analyze what adjustments you can make in your financial life to improve your tax situation, calculate what improvement this will make on your taxes, and then assess how that adjustment will impact any other financial goals you have. While these adjustments may not be obvious to all of us, hopefully you can identify a few with the assistance of a Financial Planner or CPA. Here is a short list of questions you may ask yourself as you’re considering making some adjustments:

• Should your retirement savings be pre-tax or into a Roth, or both?

• Should you pay extra on your mortgage or save additional into a tax-sheltered retirement account?

• Should you consider converting some of your Traditional IRA money to a Roth IRA?

Step 3 — Finally, once you’ve considered your current tax situation, identified some ways that you can adapt your financial life to improve your tax outcome, the last step is to implement those changes. Keep in mind that the IRS has rules regarding when certain adjustments need to be made in order to impact that year’s taxes. What a disappointment it would be to implement the right tax strategy at the wrong time, potentially making your tax situation worse, not better.

 

Mike Bernard is a Certified Financial Planner at Korhorn Financial Group. He can be reached by phone at (574) 247-5898 or by email at mbernard@korhorn.com.