Dunn NC CPA, Matthew Smith, CPA, Accountant, Audit, Tax Preparation Firm Offers Tips on Tax Planning

Sept. 11, 2010 - PRLog -- Remember the old cliché about death and taxes?  Whoever coined the phrase was a wise soul in my opinion because paying taxes certainly is a part of life.  Since every U.S. citizen is subject to the income tax system, having a basic understanding of how the system works, or using the services of a tax professional, can help us minimize what we’re required to pay.  This is done through what is affectionately called “tax planning.”  Tax planning is the process of proactively analyzing differing tax options to maximize after-tax wealth in current and future years.  In its basic form, the goals of sound tax planning are to decrease taxable income through legally reporting lower income or higher deductions and by taking advantage of any available tax credits.

Reducing Income

Our tax system uses a graduated scale, so the more money we make the more tax we pay.  Reducing reportable income is a great way to save taxes.  Note that I’ve said reducing “reportable” income.  Most of us work hard to make more money each year, so reducing income sounds counterintuitive.  But, some income we earn doesn’t have to be reported.  For instance, we can participate in employer sponsored retirement plans like the popular 401(k) plan and keep those dollars out of income.  Another common way to reduce reportable income is through employer sponsored cafeteria plans or section 125 plans.  Participation in this type of plan allows for the payment of certain employee benefits like health insurance with pre-tax dollars.

Increasing Deductions

Some things we pay for can be deducted before we arrive at Adjusted Gross Income (one of the most important numbers on a tax return) while others are only deductible if we itemize our deductions on Schedule A.  Deductions taken before we arrive at the Adjusted Gross Income (AGI) figure can be more helpful in minimizing taxes because certain itemized deductions and tax credits get reduced at higher AGI levels.  Before AGI deductions include contributions to individual retirement accounts, health insurance premiums for self-employed individuals, college tuition, and student loan interest among others.

Tax Credits

Tax credits are the best tax planning tools because, unlike deductions, credits reduce tax liability dollar for dollar.  There are myriad tax credits in the tax code.  This is a complex area, but most year-round tax professionals can help determine which ones we’re eligible for.

Matthew Smith, CPA is a tax partner in the Dunn, NC office of Todd Rivenbark & Puryear, PLLC and can be reached at matthew@trpcpa.com or (910) 891-1100 x2215.

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Todd Rivenbark & Puryear, PLLC is a Certifed Public Accounting and Consulting firm providing tax preparation, financial statements, audits, bookkeeping, payroll services, estate planning, business consulting and other services to closely-held businesses and individuals in central and eastern North Carolina.