By: Jason Schneider, CPA
Taxes are often a sore subject and with the latest tax season firmly behind most of us, the last thing we want to do right now is talk taxes. While it may not be pleasant to talk about, now is actually the best time to start looking at your 2013 tax situation and how you can put yourself in the best possible tax position available.
Let's take a moment to look at the true cost of taxes that each of us may face. We all know about the income, payroll and property taxes we pay, not to mention the growing sales tax, but we also have some other taxes that may not be readily apparent. In California we pay a pretty hefty tax at the gas pumps as well as paying Transient Occupancy Tax (TOT) when you travel. All told, our income and payroll taxes alone could add up to 62% of our income for earners in the highest tax brackets. That doesn't include property taxes, sales taxes, gas taxes or TOT tax. Once you add in those items, it seems that we could be sending 2/3 of our income to the government.
Some of these, such as payroll and property taxes are difficult to control, but others are not. The income tax code allows for quite a bit of ground in which to reduce your taxable income and therefore reduce the taxes paid, but the key to taking advantage of many of these provisions is proper planning with individuals who are well versed in the tax code. Besides helping to put yourself in a better position this tax year, proper planning will allow you to better your tax position in the future. A simple example of this is seen in a Roth IRA conversion. While traditional IRAs grow tax free until the money is withdrawn at retirement, any traditional IRA funds that are converted to a Roth IRA will result in 100% tax free distributions at retirement. The cost of this treatment is paying income tax currently on the amount converted; however when you consider that all future income and appreciation is 100% tax free, paying tax today may in the long run be a better way to go, especially if the tax rates increase in the future.
While this is a relatively simple example of planning, there are other complexities wrapped up in a Roth conversion, so you should consult a tax professional prior to deciding if it would be a good idea for your specific situation.
While not nearly all of us will be faced with sending 2/3 of our hard earned money to the government, the point here is that with proper planning by qualified individuals in a timely manner, you can help to alleviate some of the tax burdens that you face. It's been said that "an ounce of prevention is worth a pound of cure" and that is just as true in the tax world as other aspects of our lives.
Jason Schneider is a certified public accountant with Osborne Rincon, CPAs in La Quinta. He can be reached at (760) 777-9805.