There is a major difference between a tax preparer and a tax advisor. Tax preparers, although many may advertise that they can save you money with your taxes or get you a better return, their actual job is really focused on the actual paperwork of filing out your taxes. A tax advisor is actually what you should look for if you are hoping to save money on your income tax.

Here are some tips you can use to choose a good Tax Advisor:

Yesterday I saw a Christmas tree in a local department store. It’s way too early to think about Christmas but not to early to do some 2007 tax planning. Ask yourself, are you making one or more of these tax planning mistakes? If so, you’ve got some time to correct the situation, but act now, or we’ll be having this conversation again next year.

1. Not planning your tax strategy

The biggest and most costly tax planning mistake is the failure to understand and plan to maximize your tax situation. Proper tax planning can save you valuable dollars this year and for many years to come. Well thought out tax strategies, with a little planning help, can save you from overpaying your taxes. Once it’s January 1st your tax planning opportunities for this year are over. So the number one tax planning mistake is the failure to do any tax planning. Don’t let it happen to you.

2. Not maximizing your 401(k) or 403 (b) retirement plans

Are you leaving money on the table with your 401(k) or 403(b) retirement plans? Do you know how much the employer contributes to your plan based on your contributions?

For example, if your employer puts in 50% for everything you contribute up to 5% of your pay and you are only contributing 3%, at $40,000 a year you are leaving $400 on the table ($40,000 x 5% contribution=$2000 x 50%=$1000 company match at 5% vs $600 at 3% or a $400 difference.)

A quick tip: Where do you get the $800 or about $15 a week, in the above example, to raise your contribution from 3% to 5%? Have you thought about the tax savings with the new before tax contribution? You can now adjust your W-4 form to properly reflect your lower taxable income. If done properly your take home pay will stay almost the same and you will have annually invested and additional $1200 ($800 from you and $400 from your employer).

If your spouse is working or self-employed don’t forget to apply the same approach to their income.

3. Excessive worry about IRS audits

Many taxpayers do not take absolutely legitimate deductions because they were afraid of showing up in an IRS audit. As long as you play by the rules, you shouldn’t fear an IRA audit. When in doubt get help from a professional, keep good records and receipts, and if you are scheduled for an audit you should get good results. Planning so you can get your affairs in order so you pay the least amount of tax required by law is completely legal.

4. Self employed paying too much SE tax

If you are self employed there are many ways to organize your business. Do you really know if you are paying too much self-employment tax? If your business is organized as a sole proprietorship or a partnership you may find the answer is yes. It could pay to investigate you options on how you should set up or reorganize your business.

5. Not Using all the Retirement Plans Available

With the continued concern about the long term viability of the Social Security system it is more important now to set up your retirement planning to assure a secure retirement. If your entire knowledge of retirement plans is your 401(k) or 403(b) and simple IRA’s you may have some additional investigating to do.

What is available goes well beyond these well-known favorites. Changes in tax laws in recent years have created additional opportunities. To find the best plans in your situation get help before the end of the year.

6. Not considering a Roth IRA in your tax planning

In continuation of #5, let’s take a quick look at the Roth IRA. A Roth IRA is an after-tax retirement device that produces huge tax savings because all tax distributions are tax-free. The initial disadvantage of a Roth IRA is the fact that contributions are not tax deductible as with traditional IRAs or 401(k)s. The advantage of a Roth IRA, however, is that all distributions are tax-free once you reach the age of 59

Countdown time is here again, with reminders everywhere pointing out how many days are left until the New Year. While you’re marking your calendar for the holidays, remember that countdown time is great for tax planning, too.

The strategy you can use to reduce your 2007 tax bill is to deferring income and accelerate deductions.

Deferring Income

1. If you are planning on selling an investment on which you have a gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year;

2. If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the employment taxes withheld) for another year. Deferral of tax generally won’t work where the bonus is contractually due in 2007. Negotiate the receipt date to be January 1 or later;

3. If your company grants stock options, it may be wise to wait until next year to exercise the option or sell stock acquired by exercise of an option. Exercise of the option is often but not always a taxable event; sale of the stock is almost always a taxable event;

4. If you are self employed, and can afford the delay in cash inflow, defer sending invoices or bills to clients. If your business is cash basis, you can send invoices in late December so you receive the cash after December 31. If your business is accrual basis, send invoices after December 31.

Accelerating Deductions

1. Pay your entire property tax bill, including installments due in year 2008 by year-end;

2. 2007 year end purchases to consider:

Hybrid Vehicles

The Energy Policy Act of 2005 replaced the clean-fuel burning deduction with a tax credit. A tax credit is subtracted directly from the total amount of federal tax owed. The credit is only available to the original purchaser of a new, qualifying vehicle.

Home Improvements

Tax credits are available for certain types of home improvements including adding insulation, replacement windows, and certain high efficiency heating, hot water heaters and central air conditioning systems. The maximum amount of homeowner credit for all improvements combined is $500 during the two year period of the tax credit. This tax credit applies to improvements made to your primary residence from January 1, 2006 through December 31, 2007.

3. Make Charitable Contributions

You can donate property as well as money to a charity. A deduction is usually available for the fair market value of the property. However, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses.

4. Investment Gains And Losses

Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher rate (up to 35%) than long-term gains (15% or lower). You might consider, where feasible, trying to reduce all capital gains and generate a capital losses up to $3,000.

The maximum long-term capital gains rate is currently 15%. This is set to rise to 20% in 2011. Many believe this increase could come about sooner with a change in administration in 2009.

Note: capital gain rate starts at Zero in 2008. From 2008 through 2010, if your taxable income falls within the 10% or 15% brackets, the rate you’ll pay on your federal return for certain dividends and long-term capital gains will be zero.

The zero tax rate generally applies to gains on sales of assets such as stocks, bonds, and mutual funds that you owned longer than a year. Qualified dividends, which include dividends on most US stocks, are also eligible.

Though the zero percent tax break becomes effective January 1, 2008, you can start planning now. For instance, it may be beneficial to wait until 2008 to sell appreciated stocks.

Some of the tax deductions mentioned above are not deductible for alternative minimum tax. If this applies to you, a different tax strategy may be required. Consult your CPA for the specific tax strategy to minimize your tax. Also, consider the tax impact of 2007 and 2008 tax years together. It may be best to pay more tax for 2007 if you expect to be in a higher tax bracket in 2008. Again, consult your CPA for the best tax strategy. December is always a good month to see your CPA.

I published a previous article on year end tax planning. See Year End Tax Planning for additional ideas. So much has changed in the tax code with expiring tax provisions and new tax provisions, that an update for 2007 was required.

Should I take wages or dividends from my privately owned
corporation? What is the best way of taking money out
of my company? In other words, what will result in the
least amount of income taxes?

A Canadian accountant will perform a dividend-salary mix
calculation to determine the best way of withdrawing money
from the corporation.

Even though Canadian income tax laws are different from
other jurisdictions, some of the same principles of tax
planning will still apply.

In order to qualify for Canada Pension Plan (C.P.P.)
benefits or to make Registered Retirement Savings Plan
(R.R.S.P.) contributions, there must be some earned income.
This requires the payment of wages. In fact, many
accountants will make sure that their clients have maximized
their C.P.P. and R.R.S.P. contributions for the year in
order to ensure sufficient future retirement benefits, even
if it costs a little more in income tax and/or payroll taxes.

On the other hand, the Dividend Tax Credit reduces the tax
payable on dividends received from the corporation, since
the corporation has already been taxed on its income.
Therefore, the accountant may recommend that the corporation
pay some dividends.

Sometimes, if the owner doesn’t require the cash, the income
is simply retained inside the corporation and tax is paid at
the lower small business rate by the corporation. If the
corporation had income in excess of the Small Business
Deduction, it likely would pay it out in wages.

Depending on the circumstances of the taxpayer, wages may be
the least expensive way of taking money out of the corporation.
Sometimes, dividends are better. Generally, a mix of both is
required.

An accountant will have to balance many factors to come out
with the optimal mix for you. He will consider your family
situation, other income sources, losses, investment and
retirement objectives, et cetera. Keep in mind that the lowest
possible tax bill for the current year is not always in your
best interests.

Tax Service Businesses from home are the hot home business of today. As more and more companies downsize and outsource work, there’s a higher demand for business tax service, tax preparation service and small business tax advice than ever before. If you’re thinking about starting a tax service business from home, consider these things:

Do you have the background and education you need? If not, are you willing to, and do you know where to go to get it? Do you want to have an income tax preparation service or a business tax service, or would you prefer to offer small business tax advice? Is this a profession you want to pursue full-time or only part-time? Will your family be affected by your having a tax service business in your home? Do you like working with numbers? Can you deal with frustrated and angry people? Is there a space in your home for an office? What equipment or supplies do you need? Do you need to get any financial assistance in starting a tax service business? Are you willing to put the necessary effort starting a tax service business? Should you have a partner? Do you need to get any additional insurance? What accounting knowledge will you need for your tax service business? Where will you go to get the information about what your state’s requirements are on starting a tax business from home? Does your state require you to have a license? What are your neighborhood’s zoning regulations concerning home businesses?

Questions like these will start you thinking about all the details you need to attend to before opening the doors to your tax business from home. Do as much research as you possibly can before making a decision.

Once you’ve done your homework and have decided that, yes, you want to go ahead with starting your own tax service business from home, make or purchase a business plan. Outline what you need to get started with your own tax business and the steps you need to take.

Goals aren’t reached by magic. They’re reached by understanding what’s involved in undertaking starting a tax business and knowing what you need to do. Making a business plan and following it will keep you on track. This will enable you to actually open a tax service from home more quickly with less trial and error. Ultimately, a good business plan ensures you’ll be successful at your tax business.

Even with a good business plan, you need to be aware that there will be obstacles in having your own tax business from home. There will be days you think you must’ve been nuts to go into business for yourself. Especially if you’re used to being in a larger business environment where there many people to help carry the business.

Because in a small business, whether it’s a tax business from home or a home show business, you’re forced to wear many hats. You have to be the boss, the administrative assistant, the office manager, the accountant, the receptionist, as well as the employee doing the work-often all at once. And there’s also the stress and pressure of having all the work, as well as all the financial burdens on your shoulders alone. Having your own business isn’t for everybody.

And, if after you’ve given it some thought and done your research, you’ve decided that a tax business from home is just the right business opportunity for you, you have many things to look forward to. There are far more positives to being your own boss than there are negatives. Not facing that morning commute is usually enough to make most people never look back. Not having to face that evening commute either, is enough to make them rejoice-and never regret for a minute, starting a tax service business at home of their own.