Tax Planning
Categories: Tax, Company Management
What will you owe? For most people, tax planning is kind of a meh issue. That is, they work for a corporation that automatically takes out a pretty-close-to-reality amount of dough from their monthly paychecks. At the end of the year, they get a small refund, or pay a bit more to true things up. No big. No fuss. No muss.
But, for entrepreneurs or risk-takers in the markets, tax planning becomes a much bigger deal.
Two years ago, you started the year with $3 million in savings. It was all invested in publicly traded stocks. That amount doubled last year to be $6 million; you sold no stocks. Then, this year, it doubled again to $12 million and you sold everything. Turned it all into cash.
Well, you have then realized a gain (likely all long-term) of $9 million, and you'll owe about 40% tax on that money, or a tax of about $3.6 million.
That $9 million jet you were gonna buy? Yeah. Don't do that. You don't have enough money. You'll have to plan for that $3.6 million. And, in most cases, you'll owe portions of it quarterly. And it'll mess with your following year's investments. You might have losses you'll want to harvest as you realize gains in the future. The losses you have from investing the $8.4 million in cash you'll put back to work at some point will be valuable tax hedges. And, in the real world, individuals not subject to simple corporate salary tax withdrawals have to pay quarterly contributions. That is, they must make scheduled payments along the way during the year, or suffer fines in various forms and flavors. (See: Safe Harbor.)
All of these moving numbers get extremely complex, as you'd imagine. So rules were set up wherein individual tax payers could vastly simplify their returns by simply paying 110% of whatever they paid in the same quarter last year. That way, there are no fines for investors realizing gains who just didn't realize that they owed all that tax.
Yes, all of this is complex, but it needs to be. Otherwise, how would we keep so many accountants and lawyers employed?
Related or Semi-related Video
Finance: What's the difference between a...23 Views
Finance a la shmoop what's the difference between a financial adviser
and a financial planner? well here's the Venn diagram of a financial adviser in a [Venn diagram appears]
financial planner and yes you can see that the financial planner is kind of a
subset of the advisor but well you know pours better coffee in other words all
financial planners are financial advisors but not all financial advisors
are financial planners okay so the financial planner what do they do they
plan financially what does that mean? while the planner looks at your budget
your rent your insurance your likely taxes and a whole bunch of other little [Financial planner duties appear]
detailing things that you could probably do entirely on your own if you thought
about it for five minutes but whatever trauma happened to you and [Man with injuries laying on couch]
your childhood rendered you somehow incapable of doing so and you called in
Mommy financial planner who held your hand and help you fill out whatever
forms establish whatever goals and create whatever programs you needed to
create whether you're an individual pediatrician, a small business or
something bigger well financial planners come in a bunch
of certificated flavors like certified financial planner yeah that's a big
catchy one and then there's corollary sidebar ones like chartered financial
consultant and for the really heavy hitter investment planning people well
there's a chartered financial analyst levels one two and three which is the
full contact x-rated version of being a hardcore financial planner so then [Types of financial planner appear]
what's a financial advisor or FA? or FAH as the Dolphins like to call them well
essentially they are your investment whisperer
they sit on your left shoulder and your right shoulder whispering about greed [Angel financial planner whispering on mans shoulder]
and fear and have nothing to do with that scene in Animal House and if you
don't know what we're talking about go ask your parents right now hit pause go
ask them.... greatest college movie in history thank you
specifically a financial advisor is typically a broker in one form or
another who directly helps execute purchases and sales of securities while
knowing a thing or three about estate and tax planning, insurance and other
financial adventures like the joys of owning real estate so a FA must have a
series 65 license or more the good ones have all passed the series
seven exam which is the granddaddy and a few are also CPAs i.e hardcore
accountants if you like not just counting beans but swimming in them well [Man jumps into pool of beans]
then these are both probably good gigs for you