Tax Planning Tips

As we move further into 2011, the April tax filing deadline begins to loom large on the horizon. With good planning, you can be ready for it and ensure you pay the least taxes legally allowable.

I like to be safe. Just like I tend to drive as if there's a police car behind me at all times, and I prepare my taxes as if I'm always going to be audited. I don't take any action that I wouldn't feel comfortable justifying to an IRS auditor. I've been audited and having this attitude made it a hassle, but not a frightening experience. I simply gathered up my records and was quite comfortable going through the returns, describing what was done and why.

Whether you use a top CPA or do it yourself with online tax software, the more you personally know and understand, the better you will do in any audit, and the less taxes you will pay overall.

Here are some basic tips to help you be prepared for tax season:

Check Your Exemptions
If you are paid by salary and you are receiving a large refund each year, you are claiming too many exemptions. Don't use the IRS as a savings plan, there are much better options. Check the IRS site, as they are set up to help you calculate the accurate number of exemptions you should claim.

Set Aside Money For Taxes
If you are an independent contractor and receive lump sum payments instead of a salary, be sure to prepare for taxes. This may be the most important tip I can offer people in this situation. We have two bank accounts, one for revenue, one for taxes. Whenever a large payment comes in, we take 30% and deposit that amount into the tax account. If you follow this practice, at the end of the year you will probably have enough money available in that tax account to cover any taxes due.

Make Advance Payments
If you find yourself paying large amounts each year, check into making quarterly estimated payments. The IRS has a system to allow you to estimate your taxes due and make regular payments over the year so you don't owe a large sum. These payments may be required for some independent filers, so check with a tax professional or the IRS.

Organize Yourself
Don't wait until April to start getting organized. If you prepare ahead, filing your tax return can be more of a chore than a . Use the experience to analyze and review your finances. Look at what you are spending and find areas to cut back and save money or areas to better invest. Good tax planning can help guide your spending and purchases throughout the year so you maximize your deductions and tax

We keep files, each with receipts and paperwork from each of our bank accounts and a cash receipts file. Receipts go into each file daily. Each month, all the receipts get entered into our accounting software, so we always have a clear picture of our financial health. When tax time comes, we use the data to prepare reports for our CPA and could also use the data to directly prepare our own returns. When entering the receipts, we code them by category, so we can run totals, by auto expenses, rent, entertainment, etc. The more accurately and more completely you enter the information initially, the more useful information you can glean from it later.

Get Help
The IRS has great people working for them who are extremely knowledgeable and helpful. Yes, it will probably take an hour to reach them, and you will have to tell your situation to three people first, but there are experts working there.

Offering as much or as little detail as you like, you can have in-depth discussions with the IRS technicians and they can tell you exactly how to file things, which forms to use, etc. I've done this numerous times and find them very helpful, whether you need help filing the simplest 1040 EZ return or the most complex corporate filing.

The tax laws are complex and change each year. Just like when needing a medical or legal professional, I recommend finding the best tax professional you can afford. Their knowledge and experience should more than justify their costs.

If you owe money or have unfiled returns, I also recommend calling the IRS and working something out. It's always better to contact them before they contact you. And remember not filing your taxes will get you put in jail, filing but not paying will get you a lot of penalties, but it's not a crime, so even if you can't pay, it's better to file.

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