Monday, April 28, 2008

Tax Time is Over - It's Not Too Late To Plan for Next Year

The last few weeks before taxes are due I field a lot of calls from desperate tax payers who sold an asset in the past tax year and now are faced with writing a huge lump sum check to the IRS.

Most knew it was coming, but were not prepared for the amount their accountant just presented them with. It is often double or triple what they expected to pay. Some have no idea where the money will come from because they either spent the proceeds or re-invested into another asset.

The worst news is that it is too late to do anything about it. The event took place in a previous tax calendar year, the proceeds were dispersed and no tax strategy was in place prior to their sale or at least prior to December 31.

This same scenario takes place each and every year and the outcome doesn’t change. The time to start searching for ways to pay less in taxes is before the sale and not months after it has been completed. Human nature is to put things off until the absolute last minute of a deadline and then scramble around in panic to try and salvage a disaster in the making.

The other trend is to find out what options are available and then not take action because it takes too much effort to understand the process and the benefits. It is similar to hiring a Financial Planner to outline a series of steps to start investing for your retirement and then ignoring the plan completely because it’s easier to just spend your whole paycheck rather than putting money aside for your future benefit.

The big picture is often the hardest to comprehend. You may have to feel you are sacrificing a bit now (spreading out the receipt of your gain) versus collecting it all in a lump sum immediately. Instead, you need to see it as achieving a greater amount overall at the end of say 15-20 years.

If you contributed for 30 years to a pension plan at work so you could retire at age 65 would you withdraw 100% of that money the day you retired and pay taxes on all of it at once? Most likely it would never cross your mind. That money is what you will live on during your retirement years.

So why would you want to pay taxes all at once on the sale of your asset and then have to turn around and re-invest what was left over in the same type of safe vehicle that it would be going into anyway with a tax strategy only missing 15-30% of what you would have started with?

As with any investment, it’s not what you make, it’s what you get to keep.

Paula Straub
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