Johnson Nathaniel

It’s August, and you most likely submitted your 2021 tax return months ago. For most, taxes are the last thing they want to think about once they’ve finally submitted their return. The truth is, however, thinking about and planning for tax season can make a monumental difference when it comes to your bottom line.

Depending on your circumstances, proper planning could lead to a significant reduction in taxes paid, which means more money goes where it matters most: growing your business.

What is tax planning?

Tax planning is much more than coming up with an estimate of your tax liability and how much you should leave aside to pay your taxes. At a high level, it’s taking a look at the entirety of your financial situation and ensuring that all facets work cohesively to ensure you pay the least amount of taxes legally possible.

The planning process considers various factors, including the size and timing of purchases, expense planning, deduction and credit opportunities and more. This process will also help you select the optimal investment and retirement plans that complement your overall financial strategy and filing status.

Should I have a tax plan?

Consider this: Taxes are the single largest expense most will pay year to year. Last year alone, the government collected $4.05 tril in taxes. Truth is, in your lifetime, you will almost certainly give more of your money to the government than you will spend on any other single endeavor. Hence why tax planning is critical.

A tax plan is one facet of an overall sound financial strategy, albeit a critical one. Unfortunately, however, many people overlook this important aspect, and in turn, end up overpaying significantly at the end of the year. Whether you’re just starting your business or a seasoned veteran, it’s never too late or too early to build a plan.

Whether you’re going to create a plan on your own or partner with a professional, you should start taking action. Getting your plan in place is step one in getting ahead of the competition, allocating more money towards business growth and ultimately reducing your overall tax liability.

Through October 2022, you can buy Series I bonds that pay 9.62% interest; and you receive that rate for 6mos from the time of purchase.

What happens next?
✔ On 11/1/22, the U.S. Treasury sets a new 6mo rate equal to the fixed rate (currently 0%) plus the Consumer Price Index inflation rate.
✔ The interest you earn for the 1st 6mos gets added to the principal, and you earn interest on that interest during the next 6mos (think compound interest).
✔ Sounds too good to be true. There’s a trick, right? Not really, but the govt keeps your $$ (both your principal and interest) for at least 1yr.

The Mechanics?
✔ You’re buying a 30yr bond. The interest rate changes every 6 mos. You can cash out anytime after 1yr, but if you cash out before 5yrs, you forfeit 3mos of interest.
✔ You don’t pay taxes on the interest until you cash out. You get the compounding effect tax-free. It’s like a Roth IRA without the age limits and penalties.
✔ When you do cash in, you pay federal income taxes on the interest, but you don’t pay state, county, or city income taxes.
✔ You can avoid taxes on the interest altogether if you use the $$ for qualified higher education expenses.
✔ Key point. You can’t lose the $$ you invest or interest you earn.

The Downside?
✔ The main downside is you can’t buy more than the following annual limits:
❶ You can’t buy more than $10K/yr (*You can buy an add'l $5K/yr, if you use your tax refund)
❷ If married, double the ❶ limits, and
❸ If you own any Corp(s), they can purchase up to $10K/yr.

Inflation and Deflation
✔ I bonds are based on inflation. If inflation drops to 0, cash out. Meanwhile, ride this inflation wave. Your I bond can’t decrease in value. If your $10K bond earned $985 in interest, the new balance is $10,985. Deflation can’t hurt it...........

Getting ready to participate in a virtual panel discussion about entrepreneurship at the Los Angeles Black Business Expo