Prepare to Plan Your Taxes or Plan to Pay More

Hey Paul: What is the difference between “tax planning” and “tax preparation”? Are they the same thing?

These two terms are closely related and I suppose could mean the same thing to some people. For those who are procrastinating doing their taxes until April 18th could claim to be in the planning stage – collecting W2’s, charitable gift receipts, etc. But tax professionals would refer to everything you do to get your 1040 done as “tax preparation.”

Tax Planning typically refers to the development of tax saving strategies that precede the tax preparation stage. Tax planning takes place in the calendar year before taxes are settled the following mid-April — after December 31st there isn’t much you can do about last year’s finances.

The following is a list of “tax strategies” you can think about implementing this year – or perhaps serendipitously you can use for 2015 taxes if your story fits.

  • Contribute to qualified retirement accounts: By making an IRA contribution or other tax-deferred income such as to a 401(k) during the year you will delay taxing that income. For the roughly half of the U.S. households who pay no Federal income tax, contributing to a Roth IRA will result in little or no additional Federal income tax now and tax-free withdrawals in the future.
  • Cover health care expenses pre-tax: For those with employer-provided health insurance, you can pay no Federal, state, or payroll taxes on your share of the premium. Flexible Spending Accounts (FSA) have similar tax benefits and cover out-of-pocket medical expenses including dental and vision. Starting last year FSA plans have an option to rollover up to $500 of unused funds; in the past it was a use-it-or-lose-it fund. Health Savings Accounts (HSA) need to be coupled with high-deductible health insurance and are essentially a bigger version of an FSA.
  • Itemize rather than take the standard deduction: The major categories are charitable giving, taxes (property, state income or sales taxes), and mortgage interest expense. For single and married households the standard deductions are $6300 and $12,600, respectively. These are high hurdles to cross if you don’t have a mortgage. One strategy is to lump deductions into a specific year by making early property tax payments or high charitable giving.
  • Start a side business: Small business owners love their write-offs – home office space, cell phone, business related mileage, etc. Landlords are infamous for having accounting losses due to depreciation of the home while actually having a fairly profitable rental business. Put your child to work as part of the family business and they will pay no taxes on the first $6300 of their income — more importantly you turn an allowance into an earning.
  • Give money away: Giving is not only good for the spirit but also to avoid taxes. If the gift is to a qualified non-profit than it may be deductible as an itemization. Another strategy is to gift (up to $14K!) to anyone. Give away assets that have losses or small gains since you acquired them and try to leave highly appreciated assets as part of your estate when they will escape capital gains taxation. To whom should you give? One idea is to set up a Roth IRA or 529 College Savings plan for a child or grandchild. These investments grow tax-free and withdraws are tax free if used for retirement or college. You can also give directly (up to $100K!) from your tax-deferred retirement account to a charity – this escapes taxation entirely on that income.

For the rich-and-famous tricks such as characterizing business income as a capital gain that is taxed much lighter than regular income and avoids payroll taxes. This is one way Wall Street hedge fund managers and CEO’s pay less tax than their secretary. If your patriotic ties aren’t binding you could move to a foreign country – or at least shift your assets to the Cayman Islands. At some point we cross the line from tax avoidance to tax evasion!

If you missed the opportunity to purposely reorder your 2015 finances to qualify for lower taxes there still exists the opportunity to make the most of what naturally occurred last year. Here are the things you can do to be a smart tax filer:

  • File your taxes – it’s the law and you may actually get 1000’s of dollars from the IRS. In my estimation there is a much more money left on the table by those who don’t file or miss obvious tax savings compared to those who don’t file thinking they are beating the system.
  • Use low-cost tax software, free tax prep such as offered by the AARP (Mon. and Wed. mornings at the Jessamine Public Library) or a tax professional. I would highly advise against the old-school method of pencil, calculator and tax instruction booklets!
  • Take the tax credits that you qualify for – EITC, child tax credit, various college education credits, retirement contribution credits and many other tax savings are potentially there for you. Tax software or a qualified preparer will (almost) certainly catch all of these as long as they know your story.
  • Contribute up to $5500 (or $6500 if over 50) to an IRA. This will delay when the income is taxed which may be lower in retirement than in your working years. You can make an IRA contribution up to the tax deadline and have it count for 2015.

So by spending a few hours a year preparing taxes you can save a few hundred dollars in fees; By spending a few a few hours in tax planning you can potentially save much more by choosing the favorable actions and timing to minimize your tax liability.

Dr. Paul Hamilton is an Associate Professor of Economics at Asbury University and a CFP providing financial coaching to middle-class Americans. He is available to provide free workshops to churches, local businesses and other groups. Contact him at or


Posted in Health Insurance, Retirement Planning, Tax Planning