What to Expect From Your Accountant in the Summer Months (Part 2 of 3)

Fearlessness is the gateway to success. One should therefore shun all kinds of fear.
~ Rig Veda

If you have a topic of interest you would like to see us cover, feel free to reach out and let us know; we are always happy to hear your thoughts, ideas, and feedback.

Last time we covered a general list of activities your tax specialist does year round, and we promised you more detailed information on items that may be of interest to you. As always, please don’t hesitate to speak with us if you have any questions about your specific individual or business tax situation.

About Tax Planning

Tax PlanningTax planning and projections are a value-added service that few accounting firms offer to the general public. This unique service involves a deep understanding of taxation, business, finance, accounting, and how to conduct in-depth research. Tax planning services vary greatly, and can be performed for individuals and businesses alike.

Projecting Taxable Income

One aspect of the tax planning service is to project the taxpayers’ taxable income for the current year.

For those with salaries, that means forecasting year-end pay slips and projecting W2 forms for one or more employers. This is easier said than done, once you throw in the tax preference items like 401K’s, IRA’s, HSA’s, FSA’s and a whole entourage of fringe benefits. These items are all treated differently, and each one comes with its own set of limitations, calculations, savings, and applications.

For the self-employed, it means creating a projected profit and loss statement to gauge the amount of net income.

Other examples of income projection can include:

  • Reviewing the plans for a sale of a primary residence or rental/investment property
  • Liquidating stock holdings or consulting on portfolio interest and dividends to be earned
  • Early or timely retirement distributions

Calculating Tax Implications when Switching Jobs

Another good opportunity for tax planning is when your job situation changes. It can produce a variety of tax implications, which a tax plan can address.

  • Overpayment of Social Security and Medicare taxes
  • Under- or over-withholding federal income taxes
  • Withholding for the wrong state/local income taxes
  • Incorrectly allocating state income on W2 forms
  • Over-contributing to retirement plans, creating possible excise tax implications
  • Planning for additional year-end deductions when one no longer qualifies or is no longer eligible

Assisting with Estimated Tax Payments and Avoiding Penalties

Penalty NoticeMost people are under the impression that income taxes are due by the 15th of April, and in fact, they are not. The U.S. tax system is a pay-as-you-go tax system, and the taxes are actually due in quarterly estimated installments – with exceptions, of course.

The quarterly installment due dates fall on 4/15, 6/15, 9/15, and 1/15 each year. There is no requirement to make these quarterly installments, however, as with most systems here in the US, if you are in the wrong, the government simply teaches you a costly lesson, by imposing tax penalties with interest and in some cases the penalties and interest can go into the thousands of dollars.

The hard and fast rule to help alleviate these “underpayment penalties” is to have the taxpayer prepay the smaller of:

  1. 100% or 110% of the prior year taxes, or
  2. 90% of the current year estimated taxes

Most will blindly send in the 100%/110% of the prior year tax in quarterly installments under what we call the “safe harbor” method, however, the tax situation may have changed drastically from last year to the next, and sending the same amount of estimated tax based on the prior year tax liability may no longer be applicable.

Whether using the prior or current year tax method, many may be paying in quarterly, when their income flow is not spread out evenly over the year, and the client may not be aware that there is an annualized income method that can be elected to pay in estimates to better match the income stream. Examples of seasonal workers would include movers, landscapers, and holiday helpers.

Scheduling Estimated Tax Payments

Keep in mind that the installment due dates start on the least convenient time of year, April 15! Believe it or not, even though you may be a seasoned pro in making your own estimated tax payments, you can’t help but worry if you are sending in the right amount of estimated taxes. It helps that much more when you have a tax specialist taking on this responsibility over for you.

We hope this information is valuable for you. As always, do not hesitate to reach out to us if we may be of any assistance to you.

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