Halloween is over and the first snow has fallen already…and it’s way too early, in my opinion! But what it is not too early for is yearend tax planning discussion. Here are the top five reasons I would recommend an early planning discussion with my clients.
- Tax Law Changes
The Tax Cuts and Jobs Act (TCJA) was signed into law in December of 2017, creating the biggest change in tax law in years for both businesses and individuals. Reduced tax rates, changes in depreciation choices, the Qualified Business Income (QBI) deduction, standard versus itemized deduction changes for individuals — all parts of the TCJA. The changes are still occurring, not only at the federal level, but also at the state level. By planning you can learn what new changes take effect this year and how these changes will affect you. This will give you time to adjust what you have been doing to what makes the most sense so you can reduce your tax bill and your payments. Do you need to make a change in your salary or withholding? Should you buy that piece of equipment this year? Planning can help you make these decisions.
- Eliminate the Surprises
Some surprises are great, but finding out that you owe hundreds or even thousands of dollars by April 15th would not be one of them. By knowing this in November or December, you can eliminate the shock and also make some adjustments.
- Reduce or Eliminate Penalties
If you owe money for your taxes, the next question to ask is will you be subject to an underpayment penalty for not paying your taxes during 2019 or can you wait until April 15, 2020 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, 2020. 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% of your tax liability. Therefore, 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. The safe harbor method works well for individuals that have the same or more income during 2019 than they had in 2018. If you have significant changes in your income or deductions during 2019, it makes sense to project what your tax liability will be for 2019 to keep you from over or under paying.
- Time Value of Money
As we all know, to pay a $1 today is not the same as paying a $1 tomorrow or the next year. If you have overpaid your taxes 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 money in November and December instead of waiting until April when you file your income taxes. If you owe more taxes, it allows you to decide when to pay in the additional amount to keep penalties down, but hold on to your funds until needed.
- Be Prepared Earlier
Doing a projection now will get you situated so that when January comes and you get your tax documents in the mail, you will have already accumulated much of the other information that you need for your taxes. It will help you to have your accounting information for your business reconciled and recorded through much of the year. Also, by preparing a projection, you have time to talk to your CPA and ask questions about your taxes so that you have more information and knowledge on what is important for your tax situation and what you need to accumulate. You will be able to complete accumulating your tax info and be ready to get your taxes done first when your accountant is fresh and eager to get started.
Take a moment now and consider if any of these reasons make sense to you and if they do, give your CPA or tax accountant a call today. It may be the best treat you have given yourself in a long time!
A little more about us:
Located in West Des Moines, Iowa with a branch office in Winterset, Iowa, McGowen Hurst Clark Smith (MHCS) celebrates 70 years of extending excellent service to our clients, providing them with accounting, auditing, consulting and financial planning 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.
MHCS 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 MHCS feels is vital in today’s business environment.