Christmas shopping, holiday parties and tax planning are all items on your to-do list for December. What? You don’t have tax planning on your list? Well, here a few reasons you might want to add it.
- Eliminate the surprises. Christmas presents under the tree is a great surprise; owing taxes on April 15th is not. Planning in December can eliminate the surprise and make it easier to handle or change.
- Opportunity 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 equipment you need or make a bonus payment to a valued employee or yourself! If you are an individual who receives a W-2, you may want to change your withholding so that you will not owe as much or nothing at all by the end of the year and reduce any penalty for underpayment of your taxes.
- 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 15, 2017 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 wait and pay in the amount owed by April 15, 2017. As you can see, the first exception requires that you are estimating your tax liability during the current year to be sure you are paying in the 90%. Because of this, most people I know take advantage of the second exception by paying in what are called “safe harbor” estimates since they are based on the prior year liability, which is a known amount and can be easily and exactly calculated.
- Preparation for year-end. Doing your work now for your projection allows you to be prepared so that when January comes, you are 11/12ths of the way done. You just need to add the December information and send everything to your accountant. You could be the first to get your info in to your CPA when she is fresh and eager to get started!
- Best use of money. If you have overpaid substantially, you may want to skip your 4th quarter estimate, or you may want to adjust your withholding down so that you get back that extra tax in December instead of waiting until February or March. If you owe, it allows you to decide when to pay in the additional amount to keep penalties down, but hold on to your funds until needed. I know that this is not a big deal now since interest rates are so low, but it still can put some money in your pocket.
I hope this inspired you to add tax planning to your to do list so that you won’t be surprised when April 15th rolls around. Happy tax planning!
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.