It’s that time again! No, I’m not talking about “Trick or Treating” since sadly that time has come and gone! It is time to do your tax planning.
Why, you may ask? Well, here are some of the reasons I recommend tax planning to my clients.
- Eliminate the surprises. Some surprises are great, but discovering that you owe hundreds or even thousands of dollars by April 15th would not be one of them for most of us. By knowing that you owe taxes in November or December, you can eliminate the shock and allow time to make needed adjustments – which leads us to #2.
- Have time to make changes. By doing the projection, you will have time to make changes. For instance, if you have a business you may be able to purchase that piece of needed equipment or extend a bonus payment to a valued employee or yourself! If you are an individual who receives a W-2, you may want to adjust your withholding, decreasing the amount you will owe at the end of the year, and reducing any penalty for underpayment of your taxes – which takes us to #3.
- Reduce or eliminate penalties. If you owe money for your taxes, the next question I would ask is will you be subject to an underpayment penalty for not paying your taxes during 2016 or can you wait until April 18, 2017 (delayed date due to observance of Emancipation Day) to pay the balance owed? If you owe over $1,000, there are two exceptions that will keep you from owing a penalty. 1) You have paid in 90% of the tax you owed for the current year, or 2) you paid in 100% of your prior year’s tax liability (110% if your adjusted gross income was over $150,000 last year). If you meet either of these exceptions, you are not subject to an underpayment penalty and you can postpone payment in the amount owed until April 18, 2017. As you can see, the first exception requires that you estimate your tax liability during the current year paying in at least 90% of what is owed. This estimate can be tricky, so most people I know take advantage of the second exception by paying what is called a “safe harbor” estimate. This estimate is based on the prior year tax liability which is a known amount and can be easily and exactly calculated.
- Assists with preparation. Another reason to do this projection is that it allows you to be prepared so that when it is time to file your 2016 tax return, you have already accumulated much of the needed information such as charitable deductions and other tax documents. Also, by preparing a projection, you can visit with your tax accountant and obtain more information and knowledge on what is important for your specific tax situation. Then you will be ready to get your taxes done early when your accountant is fresh and eager to get started.
- Control of your money. Finally, it allows you to make the best use of the time value of your money. If you have overpaid substantially, you may want to skip your 4th quarter estimate or adjust your withholding down allowing you to get back that extra tax in December instead of waiting until February or March for a refund. If you owe money, it affords you the opportunity to decide when to pay the additional amount to keep penalties down, while maintaining your funds until needed. Obviously with interest rates so low, this is not a big deal but it still can put some money in your pocket.
So take a moment and consider if any of these reasons make sense to you. If they do, give your tax accountant a call and see what he/she suggests. Remember tax planning is key and can open the door to help limit your tax liability.
A little more about us:
Located in West Des Moines, Iowa with a branch office in Winterset, Iowa, McGowen, Hurst, Clark & Smith, P.C. celebrates 65 years of extending excellent service to our clients, providing them with accounting, auditing, consulting and investment expertise.
Established in 1946, our staff has grown from 3 to 60 employees, making us large enough to provide our clients with a broad base of experience and resources, yet small enough to offer very personalized service—which we feel makes us stand apart from other CPA firms. In addition to the traditional services of Accounting, Tax Preparation, Audit and Business Consulting, MHC&S offers our clients specialized services including Estate Planning, Business Valuations, Cost Segregation Studies, Retirement Planning, QuickBooks Training, Financial Advisory Services, Fraud Detection and Deterrence, Business Succession Planning, Litigation Support and more.
MHC&S is a member of CPAmerica International, Inc., a national association of accounting firms offering membership to only 90 firms throughout the United States. This association offers a wide pool of additional technical expertise to the members firms, as well as continuing professional education necessary to maintain the degree of excellence which MHC&S feels is vital in today’s business environment.