April is one of the most stressful months of the year for many Americans. Submitting your tax return is easier than ever, thanks to innovative software and electronic tax filing. However, this also means that more of us are putting off filing our taxes until the last minute. Neglecting your long term income tax planning is a costly error that can impact how you live now and how you’ll enjoy your future retirement.Without proper income tax planning, you can fall victim to two portions of the tax code that can severely impact how much you can spend now and save for later. First, your tax bracket determines how much of your income you must pay to the IRS each year. If you enjoyed a significant raise, or your spouse returned to work after an absence for child care or education, you could fall into a higher tax bracket that requires you to pay higher taxes.
Second, a growing number of families are now subject to the Alternative Minimum Tax. Originally designed as a tax on the super-rich, the AMT forces a minimum tax on families with AGIs above a designated threshold. Unfortunately, that threshold has not risen at the same pace as salaries and real estate values, meaning that you could wind up paying more taxes than you had planned.
For these two reasons alone, you should make income tax planning an important part of your annual routine. Just like a regular check-up with a doctor or a dentist, an income tax planning session can alert you to the early warning signs of trouble. Meeting with these professionals can identify ways that you can reduce your overall tax burden.
Income tax planning doesn’t have to be stressful, and it doesn’t have to involve last minute meetings with your financial planning team. If you begin your income tax planning process during the summer and fall, you can map out a financial strategy that legally reduces your adjusted gross income without stunting your earning potential. This way, you can ensure that you and your family enjoy a consistent quality of life without any surprise bills from the IRS.
