Key Takeaways
- There are two types of tax planners; historians and futurists.
- Tax historians look to the past to plan for their taxes and can often be left with costly surprises or pay more taxes than they should by not researching changes in the tax code.
- Being a tax futurist, where you plan your taxes in the first quarter based on changes to the tax code, employer benefits, and personal situation, helps you control the taxes and keep money in your pocket.
Are you a historian or a futurist? You probably have different answers depending on the subject, but let’s look at this question as it relates to doing your tax planning and completing your tax return.
To determine whether you are a historian or futurist, answer the following questions:
- Do you rely on last year’s tax information to plan for the upcoming year?
- Do you depend on paying the same amount every year?
- Are you knowledgeable about current tax savings?
If you answered yes to these questions, you are a tax historian.
- Do you do annual tax planning every year, typically in the first quarter?
- Do you research new tax codes to look for changes in credits, adjustments and deductions?
- Do you check your employer’s benefits for any changes?
- Are you aware of how personal lifestyle changes affect your taxes?
If you answered yes to these questions, you are a tax futurist.
Is it better to be a tax historian or a tax futurist? Let’s look at how these tax planning types operate to determine that.
The Tax Historian
This type of tax planner looks at the past. As the questions above show, they look at past tax returns, rely on paying the same amount every year, and are knowledgeable on the tax code of the past year. The disadvantage to being this type of planner is that you may have some surprises:
- You might owe more tax than you thought – this could cause you to have to borrow money at high interest rates to pay by April 15th.
- There could be new tax code changes – maybe there are deductions, adjustments or credits that could benefit you and reduce your taxes.
The Tax Futurist
As the name suggests, this type of tax planner looks to the future. As the questions above show, they do annual tax planning in the beginning of the year and they check out the new tax code to see if anything has changed that can benefit them. They also look at a few other things that a tax historian does not:
- Employer benefits – these don’t always change every year, but when they do, it can be a significant advantage to you.
- 401k – They might offer a plan or a change to the 401k to a different version like a Roth. They could add an employer match, or increase the match.
- Health Insurance – They could have added the option of a Health Savings Account (HSA) or flexible spending account, both of which are deductible and you pay health expenses on a pre-tax basis.
- Tax-deferred programs – They could have tax-deferred compensation or other programs.
- Personal Situation – certain life changes can influence your taxes, so if you know they are coming, planning for them can be an advantage.
- Getting married
- Having a child
- Buying a house for the first time
- Selling stocks and other assets that create gains, where you can take advantage of various parts of the tax code as it relates to your circumstances
Being a tax futurist and not a tax historian is really what you want to strive for. As a futurist, you control the taxes as best you can to keep you from experiencing any costly surprises and put more money in your pocket. This ultimately helps you build wealth faster. It’s all about making good, smart tax choices!
Until next time, enjoy.
Gary