It’s probably not surprising to know that about half the population feels like their tax bill is too high, but what is interesting is that so few people choose to do anything about it. In fact, only about 50% of people seek financial advice and take action, even though there are no laws that force people to pay the maximum possible taxes. Many of the rules and regulations on the books today were added specifically to help people reduce their tax liabilities, but somewhere along the line, this message got lost and there is a lot of misinformation regarding the legality and morality of paying less tax. We’ll explore some of the common terms related to minimizing tax payments, so you can see which ones will help you keep more money in your wallet come tax time.
Tax preparation refers only to the process of completing accurate and tax-code compliant tax returns. It’s something you could do on your own, though most people hire a professional or use software to calculate the taxes owed. This is data entry of the relevant information into the tax forms to get a mathematically correct result.
If you run an online search for “tax mitigation,” you’re likely to see all sorts of worrisome terms, like “avoidance” and “evasion”, which can both refer to tactics considered illegal, but there’s a huge difference between those terms and mitigation. Mitigation refers to reducing the amount owed in a legal way. This is generally done by deferring tax payments through things like retirement accounts, taking advantage of credits, or engaging in business activities or investments that have been granted special tax benefits by Congress for some societal purpose. Evasion is what happens when people avoid paying in an unlawful way. The best way to reduce the total amount owed in taxes is through lawful mitigation.
Tax Consulting is sitting down with a tax professional to discuss a specific issue or set of issues. This type of comprehensive advice is not part of what a tax preparer does because it involves forward-thinking behaviors as well as a deep comprehension of the law. Tax consultants work throughout the year to help their clients save money when tax payments come due. From time to time, unique situations may also come up that a person doesn’t have the experience or expertise to manage. Perhaps an extravagant gift is being given, assets are being structured as part of estate planning, or someone plans to buy/sell something of value as a one-time instance. The amount the government receives from these types of transactions should be minimized. A tax consultant can offer advice on the legality of the transaction, reducing liabilities, and more. Tax consulting takes time away from preparation and mitigation work, so it’s best to schedule a specific time with your professional so that they can focus on your needs.
When someone assists you with tax preparation, they can help make sure you’re getting all the rightful deductions and credits, so your tax bill ends up being lower. But, by the time someone looks at your statements and begins the tax preparation process, the options available are fairly well set in stone. Tax planning, on the other hand, is a process that’s comprehensive and looks at the total taxes you will owe over a period of multiple years. It may also involve very intentional and immediate tax mitigation concepts, such as adding money to your retirement account.
While tax mitigation can help lessen your tax burden, creating a cohesive strategy that involves all your assets offers even more benefits. For example, our previous blog, “Selling Your Business: How to Avoid Capital Gains Tax,” discusses a specific tactic that reduces the tax burden. The concepts outlined in that piece would affect a person for years, and forming a comprehensive roadmap for handling ongoing situations such as this on a holistic level not only lowers taxes but improves financial wellness as a whole. Taxes can create “drag” on your money, so it is important to reduce this drag as much as possible so that your assets can grow as fast as possible. Furthermore, when you sell/liquidate assets and generate a taxable event, it is important that you have a plan for the resulting tax bill.
Sometimes, we all make mistakes. Maybe that was you, your former accounting firm, or the IRS. But the government has sent you a letter and you need to know what to do next. Tax Compliance is the practice of representation of your issue before the IRS. Some problems can be addressed through installment plans or offers of compromise. Some can be waived entirely. A tax professional can help by knowing the right way to approach the problem and get it solved quickly.
Our focus at CREDO is to begin with preparation and add mitigation strategies. We look for the best way to leverage the information you’ve given us and within the parameters of the tax code, lower the final bill. We might make suggestions for the future or ask probing questions to see if there are better ways to fit the pieces of your financial picture together and lower the final bill. Most firms stop at the preparation point, we like to think we try a little harder.
If you have a specific complex question, we offer consultation services. For those forward thinkers who are ready to take their potential savings to the next level over the course of several years, a comprehensive tax plan is in order.
Trouble with the IRS? We can help you navigate the waters and offer compliance services.
Speak with an Experienced Tax Advisor
A lot of people worry that the cost of hiring an expert to review their finances, taxes, and tax liabilities is cost-prohibitive, but this is usually not true. An experienced and ethical advisor will save you money, even after fees are taken into consideration, and will tell you frankly when their services won’t offer many benefits. This is the way we operate at CREDO, and we’re glad to help you on a holistic level or simply look over your contracts and plans prior to a major transition. Moreover, we offer free consultations, so it’s easy to speak with an expert and get the information you need to make an educated decision about improving your financial health. To take advantage of a free consultation, complete our online form or call us at (678) 802-8800 today.