We usually leave tax planning until it is the last minute. When you open your to-do list for that day, there it is, the item you've been ignoring for weeks. It says, "Finish your tax planning." And today is the last day to file your taxes. If you identify with this, know that this laziness with tax planning can lead you to costly mistakes. Mistakes that cost you in the long run: inefficient investments, tax penalties, etc. So, we will understand some of the top tax planning mistakes and how you can avoid them.
Not educating yourself on how taxes work.
According to Warren Buffet, "the most important investment you can make is in yourself."
You are not required to study for hours and become a tax expert. All you need to do is learn to have the basic knowledge that is needed to help you. Think of it as an investment. Because in the long run, you will be glad you did.
To start, take some time every weekend and start reading tax articles. Gradually, over the course of 2-3 months, you will be able to see the difference. You will have more belief in your tax options.
And you can impress others with your tax knowledge in your office. Not bad, right?
Waiting until the last minute to do your tax planning:
Although there is a specific element of adventure that drives people to do this in their everyday lives. But if you find yourself replicating this in tax planning, it could be risky.
Risky because you will invariably call your next-door neighbor for tax advice on the last day of the tax filing season. Risky because you will follow your neighbor's advice blindly and make investment mistakes, especially when your neighbor is not a tax professional. If this is true for you, then in a few years' time, you might end up being burdened with bad investments that you have only yourself to blame.
So be smart and proactive, and do your planning on time before it is too late.
Your financial goals aren't clear enough.
These days there are many options for investing to save on taxes. If you don't understand your NEEDS, it's like a maze that can be very confusing.
Don't do tax planning such that you focus solely on saving for taxes. You should be able to plan your financial goals in such a way that it increases your wealth.
You can follow this three-step approach when defining your goals:
Invest, taking into account the financial objective
Learn and educate yourself about personal finance
Make a list of financial goals
Investing without sufficient clarity on product features
In addition to your financial goals, you should also evaluate any tax-saving investments against the following values:
Liquidity: Does this just mean that you can withdraw it when you need money for your financial needs? Is there a blocking period? Are there penalty charges for early withdrawals?
Risk: Some investments are inherently volatile, such as stocks, but can provide higher long-term returns to beat inflation. However, you have to ask yourself: Are you comfortable tolerating some volatility in the market? How much capital can you invest and sleep peacefully at night?
Taxation: People can only regulate the tax benefit at the time of investment. But ensure to also check things like income and profits tax and early retirement tax. This will give you an overall view of the overall tax efficiency of your investment.
Sticking to Old and Inefficient Ways to Save for Taxes
When it is time for tax planning, many people unknowingly continue with the legacy of their parents and grandparents. As a result, their investment portfolio has been redirected towards low-yielding investments over the years. The financial landscape we live in is very different from that of our parents.
In this context, these so-called "safe" means are really risky because they do not help you beat inflation. You also miss out on new ways to save on tax, such as mutual funds. So get out of the old world mentality, do a lot of research and then invest!
Not hiring the services of a tax professional
Whether employed or self-employed, there is no shame in applying for tax assistance. IRS penalties for certain mistakes can be severe, and you could end up paying taxes that you rightfully do not owe.
Tax laws change, so it's important to talk to your accountant to make sure everything is covered. The amount you pay to get specialist help is far less than the potential tax mistakes you could make.
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Rosovich & Associates, Inc.