Taking Control of your Income Tax Planning

It is no surprise that most Americans dread April 15th when the deadline looms for filling out federal and state income tax returns. On the surface, learning the tax code can appear more complicated than learning a new language. In fact, sometimes I read the tax code and wonder if the IRS is speaking English.

Have you ever vowed to yourself at tax time that you will be better prepared "next year" only to experience the exact same frustration when next year arrives? It is becoming a popular New Year's resolution for people to promise themselves that they will do a better job at maintaining accurate records and getting organized, or that they will pay closer attention to possible tax-saving measures. Unfortunately, many people simply do not follow through with that commitment.

Engagement in the tax and financial planning process provides taxpayers with an opportunity to take control of their income tax concerns. Instead of being a typical taxpayer and waiting for the deadline to arrive, you should plan ahead and file your tax returns prior to the April 15th deadline. Most importantly, you should file those tax returns with confidence that you are in control of your financial destiny. You may even decide to go ahead and schedule your own deadline of March 15th or April 1st and hold yourself accountable to a self-imposed deadline to defeat the temptations of procrastination. If everything goes smoothly you should celebrate your step toward total tax and financial freedom.

Disclaimer: Please note that the term "tax freedom" does not mean you will likely ever be completely free from paying taxes in this country. However, tax freedom can be achieved by taking control of your tax situation and minimizing the impact of current and future taxes with a plan that works.

Whether or not you choose to use the services of a tax professional is a personal decision and depends on your individual level of confidence with tax and other financial matters. For most taxpayers with a history of recent tax and financial problems I suggest the use of professional tax preparation services for at least a couple of years. At a minimum you should at least use some type of tax preparation software to assist with the process. Turbo Tax, Tax Wise, and Tax Cut are some of the most popular software programs that my clients have used successfully to help prepare tax returns.

Tax planning is more than just trying to reduce your overall taxes. Income tax planning decisions should always be part of your overall financial life plan. Always coordinate tax planning with your comprehensive financial planning goals and objectives. If you are working with a CPA, EA, or other tax professional be sure that they are communicating with your financial planner or other financial advisory team members.

Holistic tax planning requires a deeper focus than just trying to lower taxes. Tax reduction is great. However, it is more meaningful when used in conjunction with bigger picture planning. If you have not done so already this year, take a few moments to review your income tax plan. Don't have a formal tax plan in place? It is not too late to start. Next tax season is not too far away and will be a lot more enjoyable for the taxpayers that take the time to prepare for April 15th throughout the course of the year.

Tax Resolution: Embracing the Need for Change

As people with tax or other financial problems embark on their tax and financial planning missions they need to embrace the idea of change. Dealing with tax problems can be a significant challenge. Tax resolution planning requires you to take a different approach to managing taxes and personal finances. The tax resolution process may be difficult and frustrating at times and you should always prepare for and expect minor setbacks. If you take the steps one at a time and prepare to take control of your life as it relates to money you will be able to obtain meaningful change.

Taking Action: Elements of Change
1. Readiness to change
2. Barriers to change
3. Expect setbacks

The concept of tax resolution planning involves taking action. If you want to change your financial life and get out of tax debt you have to take action. You have to want to change and be ready to accept it with courage and a positive attitude. Improving your financial well being requires a constant pursuit of meaningful change in all aspects of your life.

Many barriers to change exist along life’s journey no matter what the challenge. In the tax and financial planning world these barriers could be procrastination and fear. Other obstacles such as lack of support or marital discord may also stand in the way of change. Whatever your personal barriers are you need to go ahead and accept the fact that there will be obstacles. You should expect to incur setbacks and prepare for them. This does not mean that you should accept failure. You simply need to prepare for the minor setbacks and never allow them to stop you on the journey to financial freedom.


Assessing the Change Process
Behavior change is an ongoing process and in theory progresses through a series of stages. These theoretical stages were introduced by James Prochaska, Ph.D. and are generally referred to as the Transtheoretical Model of Change (Stages of Change Theory). I know that is a big word. Do not focus on it as much as the importance of assessing where you are in the change process while seeking ways to resolve tax problems. As you progress through the Tax Resolution Steps (and then focus on the Steps to Financial Freedom) always keep in mind as to which stage you are in.

1. Pre-contemplation- person does not intend to take action in the next six months

Example: IRS letters are completely ignored, unwilling to discuss the need to file past due tax returns, continue to spend more than you earn, no personal spending plan, may not even realize a tax problem exists

2. Contemplation- person intends to take action in the next six months

Example: Realizes the need to deal with tax issue, understands the need for a tax and financial plan, lack of awareness where to turn to for help and guidance, do not understand the financial mess they are in, tried to create a budget in the past but failed, defensive (pulled into action before they were ready)

3. Preparation- person intends to take action in the next 30 days

Example: Researching available tax resolution options, deciding whether or not to seek professional help, beginning stages of organization, gathering tax and financial documents

4. Action- person has taken action, but for less than six months, hardest most demanding step, make a commitment to place the tax resolution and financial planning process as the top priority for the next six months,

Example: Seeking help with tax resolution issues, creating a personal spending plan, determining the best particular tax resolution alternative, working the steps of tax resolution and financial freedom

5. Maintenance- person has take action for more than six months, stress is the top reason people regress at this stage, there is a need to create positive choices or alternatives to deal with stress (social support/talking, exercise, relaxation, following a financial "life plan")

Example: Staying current with IRS payments, filing future tax returns on time, reviewing personal spending plan on an ongoing basis, communicating regularly with spouse about money

6. Termination- person will not revert to self-defeating, self-destructive financial behaviors; learning new behaviors and making them a part of who you are, similar to the challenge that people are faced with addiction

Example: Tax freedom is achieved by paying off the tax liabilities. Future tax and financial problems are avoided by consistently using positive financial behaviors. Developed the ability to take control of money and focus on other parts of life.

The LifeSpan Process of Tax Resolution and Financial Freedom promotes the termination of problematic financial behaviors. The best way to do this is to learn better alternatives such as planning, eliminating debt, avoiding debt, saving and investing. This process of change eliminates debt faster and reduces the likelihood of future tax or financial struggles.

LifeSpan Financial Planning Joins National Association of Personal Financial Advisors

I am pleased to announce that my firm and I have been accepted for membership into the National Association of Personal Financial Advisors (NAPFA). NAPFA is the nation's leading professional organization dedicated to the advancement of Fee-Only comprehensive financial planners. Financial advisors admitted into the organization meet the highest standards for professional competency, comprehensive financial planning and Fee-Only compensation. The criteria to join NAPFA include sufficient professional experience, submission of a comprehensive financial plan approved by members of NAPFA and rigorous training for the new member. As a member of NAPFA, I will have access to ongoing educational opportunities, advanced national conferences and NAPFA's superior learning center. For more information on NAPFA, visit www.napfa.org.

LifeSpan Financial Planning, LLC is a Fee-Only tax and financial planning firm located in Mount Pleasant, South Carolina. For more information on the Fee-Only tax and financial planning services provided by LifeSpan visit www.lifespanplanning.com or call 877-829-9110.

Do's and Don'ts of Tax Resolution and Financial Freedom

It is no secret that money plays an integral role in our lives. Think about the things that you do on a daily basis. Money is right there whether we see it or not. Everyone has their own belief systems related to money. In fact, we all begin creating the framework for how we view money early on in life. It is difficult to see beyond the here and now during any stressful life event. Dealing with tax or other financial problems can definitely be classified as a challenging life event that has an impact on all aspects of the life experience.

How people with tax and financial problems choose to respond to a particular financial challenge will have long-lasting implications. Similarly, the approach that tax and financial planning professionals use when dealing with their clients’ problems will also go a long way in preparing others for tax and financial freedom.

The goals of tax resolution and financial planning are quite simple. Replace the old way of dealing with money and taxes with a proven system that will help you achieve financial freedom.

STOP

Engaging in negative financial behaviors
Living paycheck to paycheck
Procrastinating and living in fear
Going deeper and deeper into debt
Worrying about your money
Putting off retirement and other life goals
Being intimidated by the IRS
Allowing interest and penalties on tax debt to grow
Trying to figure out where your $$$ went at the end of the month
Overdrafting your accounts or getting late fees
Arguing with your spouse about money

START

Planning your future and enjoying life now
Making smart decisions about your money
Taking action and eliminating negative financial behaviors
Paying cash for purchases
Living on less than you earn
Getting out of debt
Investing for retirement and other goals
Dealing with the IRS with confidence
Resolving your tax debt in the most cost-effective manner
Telling your $$$ where to go at the start of the month
Making your money work for you rather than working for it!
Working with your spouse and communicate more effectively

Tips to Stay Current with Estimated Tax Payments

Estimated tax payments are required on income that is not subject to withholding. The most common types of income that results in estimated tax are earnings from self-employment, interest, dividends, alimony, and rental income. Here are some basic tips related to estimated tax obligations.

Calculate your estimated tax payments
Many taxpayers have difficulty predicting what their actual income from self-employment and other sources (rental properties, investments, etc.) will be from year to year. Form 1040-ES is the form that is used to calculate required estimated tax payments. Use this form to calculate estimated taxes. Unless you anticipate significant changes in income, it is generally a good idea to make estimated tax payments based on 100% of the previous year’s tax liability. By choosing this option you will simply divide the total amount of tax you paid in 2008 by 4. There is an exception to this rule if your 2008 income was $150,000 or greater. Rather than being able to base estimated payments on 100% of last year’s total tax, higher income taxpayers are required to base payments upon 110% of last year’s total tax.

Review your income tax plan regularly
Staying current with estimated tax payments requires a plan. Review your actual income and tax payments on a regular basis if you are subject to estimated taxes. This is especially important if you anticipate significant fluctuations in your income. A little planning can avoid significant headaches and surprises when the next tax filing deadline arrives. In my professional experience I have seen many tax problems arise as a result of the lack of planning.

Avoid estimated tax penalties
A penalty may be applied if you do not pay enough estimated tax for the year. Estimated tax penalties may also apply if you do not make payments on time or in the correct amount. The Internal Revenue Service recently announced that interest rates for the calendar quarter beginning July 1, 2009, would remain the same. The rate for underpayment of taxes is currently 4 percent. The best way to avoid estimated tax penalties is to consistently track income and tax payments throughout the year. While this rate is currently rather low, any penalties that can be avoided will put more money in your pocket and eliminate unnecessary penalty payments to the IRS.

Plan ahead for events that may result in an estimated tax
Be prepared if you have an unexpected event occur (e.g., loss of job, divorce, early retirement, family emergency, major purchase) that requires a taxable distribution from a retirement plan or other investments that are subject to taxes. Taxpayers are frequently overwhelmed with dual focus on meeting cash flow needs and satisfying tax obligations. During uncertain economic times or when faced with a cash flow crisis, it can be very tempting to ignore basic tax obligations. Proper income tax planning can help prevent problems during both good times and bad financial times. Any potential tax event should be discussed with your tax advisor or financial planner.

Stay current with your payments
Estimated taxes are due by the 15th of April, June, September, and January. It is important to keep in mind that these are not exactly “quarterly payments”.
If needed, try making weekly, bi-weekly, or monthly payments. This will reduce the impact of the sticker shock related to quarterly payments throughout the year. A significant amount of discipline is required to make sure that funds set aside for estimated tax payments are actually available when needed. If you are routinely struggling to identify funds for estimated tax payments you should strongly consider establishing a separate bank account (e.g., checking, savings, money market) specifically for estimated taxes. Never commingle funds designated for taxes with monies that are being used to meet basic living expenses.

Use the Electronic Federal Tax Payment System
Paying taxes electronically can eliminate the need to write checks and streamline the process of paying estimated taxes. Using the EFTPS system is the easiest way to pay federal taxes for individuals as well as businesses. Taxpayers have the ability to make all federal tax payments including federal tax deposits, installment agreement and estimated tax payments using Electronic Federal Tax Payment System (EFTPS).

The Basics of Estimated Taxes

If you are self-employed you are responsible for paying the self-employment tax. Any individual who is self-employed, retired, laid-off, or disabled, is responsible for filing and paying Federal estimated quarterly taxes and in states having a state income tax, for filing and paying State estimated quarterly taxes. This can be very different from the taxation that takes place while you are employed.

First of all, the term “estimated quarterly taxes” is not exactly accurate. The IRS publishes a schedule that jumps around a little. The first payment for a tax year is due April 15. The second payment is due June 15, and the third payment is due September 15. The last payment is due January 15 of the next year. So the payment schedule is more like 3½ months, 2 months, 3 months and 4 months in making up the Federal estimated quarterly tax payments. The intent, however, is each payment represents ¼ of what you will owe for the year.

It takes discipline to plan and set aside funds for tax payments throughout the year, especially when the individual or married couple is managing their own income. If sufficient funds are not set aside as income is earned, then the individual or married couple will be put in a situation where some assets might have to be liquidated in order to come up with enough money to pay the taxes. An easier method is for the individual or married couple to know what their approximate Federal and State tax rates are and to apply those rates to income as it is earned. The calculated taxes should be set-aside in a separate interest bearing account until it is time to pay the estimated tax payments.

The IRS allows for two basic methods of calculating estimated taxes. An individual or married couple (if filing jointly) can either elect to pay an amount based on the total taxes paid in the previous year or pay at least 90% of the estimated taxes that will be due in the current year. Remember, in either situation, the amounts paid are only for estimated taxes and the actual tax due will probably differ from the total of estimated taxes actually paid. If electing to pay based on the prior year, the IRS allows you to calculate your amount and to then spread that amount into four equal payments, paying them on the estimated tax due dates.

Example: A married couple filed a joint return and the previous year’s total income was $160,000. The IRS formula is 100% of the prior year income if the income is less than $150,000 or 110% if greater than $150,000. If the couple paid Federal taxes of $42,000 last year on income of $160,000, this year’s estimated taxes would be $42,000 X 1.10 = $46,200. The estimated quarterly tax payments would be $11,550 due on each estimated tax installment date.

If you to pay at least 90% of the estimated tax due during the current year, then you must keep track of income received during the year and make sure the total estimated taxes paid by the time the last installment is paid equals 90% of the actual tax that will be due at filing time. (This should be easy to do, even if the first three installments were insufficient, as the last installment date is January of the next calendar year. This allows you to adjust the last payment for any unexpected income.) Failure to pay at least 90% of the tax due will result in a penalty being assessed on the amounts failing to meet the 90% level. Keep in mind, the 90% option is just that, 90% of the actual tax that will be due by the April 15th filing date. If you just meet the 90% amount, then the remaining 10% due will have to be paid with the final filing.

One surprise people discover when electing the 90% option is that the date of the first payment due in the next year and the annual filing from the last year coincide. Thus, not only is the estimated quarterly payment due for the current year, but any remaining balance owed from the prior year, such as the 10% not paid due to electing the 90% rule, will be due with the year end filing for the prior year. If funds were not set aside coming up with the monies to pay these taxes can be challenging. Keep in mind, these rules apply to both Federal and State taxes if your state has an income tax.

Do you Owe Estimated Taxes?

It is often emphasized by financial planners that tax planning is a year round effort. For most people the April 15th filing deadline is at the center of their tax planning concerns. However, most financial planners and tax professionals agree that tax planning begins well before the due date of a personal income tax return. The implementation of an effective tax and financial plan throughout the course of the year can help one minimize the impact of taxes and make smart financial decisions. If you owe estimated taxes to the IRS the importance of having an income tax plan in place is magnified.

Do you owe the IRS or State estimated taxes?

Estimated tax is the method used to pay tax on income that is not subject to withholding. The most common examples of income resulting in estimated taxes includes self-employment income, investment income (dividends and interest), alimony, rental income, gains from the sale of assets, prizes and awards. If the amount of income tax being withheld from your salary, pension, or other income is not enough you also may have to pay estimated tax.

Who Must Pay Estimated Tax
If you had a tax liability for 2008, you may have to pay estimated tax for 2009.

General Rule
You must pay estimated tax for 2009 if both of the following apply.
1. You expect to owe at least $1,000 in tax for 2009 after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of;
- 90% of the tax to be shown on your 2009 tax return, or
- 100% of the tax shown on your 2008 tax return. Your 2008 tax return must cover all 12 months.

Many taxpayers get into trouble with tax debt due to the failure to stay current with their estimated tax payments. Some of the most common triggers of tax problems are related to major life events. These life changes may include loss of employment, business cash flow problems, and unexpected medical expenses (to name a few). Self-employed individuals are at a huge risk for estimated tax problems. I see a great deal of people who are transitioning from being a W-2 employee to self-employment struggle with making estimated tax payments. Keep in mind that the ultimate trigger of tax problems is often the lack of a holistic tax and financial plan.

The failure to make accurate and timely estimated tax payments can lead to major tax problems. If you are required to make estimated tax payments you need to follow a tax and financial plan that will prepare you for this tax obligation. Good organizational skills and budgeting is an excellent form of prevention.

Next week I will present some basic tips to help taxpayers subject to estimated tax payments stay current with their tax obligations and prevent tax problems.

Common Traits of Millionaires and Financially Successful Individuals (Part III)

Financial freedom requires a solid understanding of your core values and beliefs. In previous blog entries various traits and characteristics of financially independent people were identified. The most common qualities of millionaires and financially successful people were identified as follows:

1) Integrity, 2) Courage, 3) Willingness to Act, 4) Commitment, 5) Purpose, 6) Creativity, 7) Balance, and 8) Persistence.

Incorporate all of these characteristics and personality traits into your life and you will likely gain a better understanding of what the term "financial freedom" actually means to you. The only constant in life is change. If you are going to change your financial life then you need to adopt the behaviors associated with these characteristics of success.

9. Spirituality

“We need to find God, and he cannot be found in noise and restlessness. God is the friend of silence. See how nature - trees, flowers, grass- grows in silence; see the stars, the moon and the sun, how they move in silence... We need silence to be able to touch souls.” - Mother Teresa

“Faith is the force of life.” Leo Nikolaevich Tolstoy

Successful people have a strong amount of spirituality in their lives. A strong relationship with their God helps guide them through good and bad times. Spirituality also provides an understanding that our actions and behaviors have a greater meaning and purpose in the grand scheme of things. Faith also provides encouragement and strength during difficult times such as experiencing tax and financial problems.

The Bible teaches us many valuable lessons about money. Some people mistakenly believe that money is the root of all evil. The scripture tells us that the love of money is the real problem. A life of faith helps people accept the role as an agent of change.

10. Love of Learning

“Man's mind, once stretched by a new idea, never regains its original dimensions.” - Oliver Wendell Holmes

“Learning is like rowing upstream: not to advance is to drop back.” - Chinese Proverb

Successful people never lose the desire to learn. Whether through reading, attending classes, learning new hobbies or exposure to new life experiences, knowledge is a key to success. The love of learning inspires successful people to be open minded and willing to advance their minds. Every person that you meet and every life event provides an opportunity to learn something.

11. Adaptable/Flexible Thinkers

“If you are truly flexible and go until... there is really very little you can't accomplish in your lifetime.” - Anthony Robbins

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” - Charles Darwin

Adaptability and flexible thinking is a vital trait of successful people. Success demands thinking outside the box. Adaptable and flexible thinkers see both positive and negatives in every situation. They also possess the ability to adapt their style of thinking in different situations. Open-mindedness and curiosity are excellent traits to possess when faced with difficult problems.

12. Patience

“Patience is waiting. Not passively waiting. That is laziness. But to keep going when the going is hard and slow - that is patience.” – Unknown

“He that can have patience, can have what he will.” - Benjamin Franklin

Success takes time to build. You cannot begin building meaningful wealth until you are completely out of debt and have established a solid financial base (e.g., emergency fund). In this day and age of instant gratification very few people have the patience needed to succeed financially.

Financial change requires a great deal of patience. Tax and financial planning issues do not usually occur overnight. Therefore, they probably cannot be dealt with in a short amount of time. You probably have heard the old saying that anything worth having in this world takes time to get. Patience does not mean sitting around and waiting. As the quote above indicates, you need to keep going and take action even when the going is hard and slow.

Common Traits of Millionaires and Financially Successful Individuals (Part II)

Previously this blog explored some common characteristics of financially successful individuals. The first three traits that were discussed included 1) integrity, 2) courage, and 3) willingness to act. Every financial life plan needs vision and guidance to help people make smart decisions regarding money matters. Successful plans also need models of success to help provide an idea of what a financially free life actually means. Below are some additional characteristics that I believe are important traits to possess during the journey to tax and financial freedom.

4. Commitment

“There is a difference between interest and commitment. When you are interested in doing something, you do it only when circumstance permits. When you are committed to something, you accept no excuses, only results.” Author Unknown

“The best way out is always through.” - Robert Frost

Commitment provides the necessary energy and dedication to keep moving forward. Committed people do more than just have the willingness to take action. They keep taking action over and over again.

Creating a plan alone will not automatically fix your tax and financial problems. Tax resolution generally takes a great deal of commitment. As the old saying goes, anything worth having in life does not come easily. Financial freedom is worth the hard work and effort. Freedom to live a financially secure life awaits those who are committed to doing everything it takes to succeed.

5. Purpose

“The purpose of life is a life of purpose.” - Robert Byrne

“Many people have a wrong idea of what constitutes true happiness. It is not attained through self-gratification, but through fidelity to a worthy purpose.” - Helen Keller

Living a meaningful life starts with a sense of purpose. Successful and happy people have usually spent time considering their unique purpose in life and have taken steps to fulfill that purpose. Successful people know exactly where they are going and why they want to get there. They have a clear personal vision to guide them in their personal lives, their family lives, and their careers. Purpose provides the energy and focus to help us achieve life planning goals.

6. Creativity

“The creative is the place where no one else has ever been. You have to leave the city of your comfort and go into the wilderness of your intuition. What you'll discover will be wonderful. What you'll discover is yourself.” - Alan Alda

“The world is but a canvas to the imagination.” - Henry David Thoreau

We all have an innate sense to create in our lives. Successful people have learned to tap into their creative spark and do so in a way that enriches their lives and the world around them. They are constantly questioning the crowd and traditional expectations. They create their own unique definitions of success and rarely subject themselves to a herd mentality. For many this could include doing things differently from a financial perspective. Saving for emergencies rather than spending to keep up with others takes some imagination. Creative budgeting and finding ways to entertain on a limited budget are other examples of financial creativity.

Other creative endeavors help successful people charge their cognitive batteries and inspire goal driven accomplishments. Creativity requires independent thinking. It also helps us tap into our ability to understand the difference between needs and desires through independent thinking and self-awareness. A creative mind helps prevent us from getting stuck in life. It helps us move forward and find new meaning and importance in our daily struggles.

7. Balance

“The best and safest thing is to keep a balance in your life, acknowledge the great powers around us and in us. If you can do that, and live that way, you are really a wise man.” - Euripides

The happiest and most successful people usually lead well-balanced lives. They take time for their families and fun times and celebrate the whole of their lives, not just parts of it. A holistic approach to tax and financial planning works because, without balance life can seem empty and unrewarding. The most successful people in this world are well rounded people that find happiness and joy in various aspects of their life experiences.

It is no small coincidence that the seventh trait of successful people is balance. This fits perfectly with the Seven Goal Areas of Life Planning. The elimination of debt and creation of wealth is a meaningless endeavor if you lack balance in your life. Strive for balance in your life as you continue on the path to financial freedom. Focus on other goal areas such as family, physical health, spiritual, career, social, and intellectual pursuits.

8. Persistence

“Most of the important things in the world have been accomplished by people who have kept on trying when there seemed to be no hope at all.” - Dale Carnegie
“When you come to the end of your rope, tie a knot and hang on.” - Franklin D. Roosevelt

Be persistent in the right areas. Financial planning behaviors must occur on a regular basis for them to become habits. Perseverance leads to prosperity. Never give up on your quest for tax and financial freedom. Most people with significant debt succumb to the urge to give up before they really even start the debt resolution process. Make a commitment to yourself and your family to be persistent with your financial life plan and always stay focused on your long-term goals no matter how hard the journey may be.