Top 5 Reasons for Tax Planning NOW!
By Kathi Koenig, CPA
Well, it is that time again! Not just for Holiday parties and Christmas shopping, but more importantly, it’s time to do your tax planning! Why, you may ask? Well, here are the top five reasons I recommend planning to my clients.
- The Tax Cuts and Jobs Act (TCJA) – The TCJA was signed into law in December of 2017 and has many changes 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. By planning now you can learn which of these changes will affect you and 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 for most of us. By knowing this in November or December, you can eliminate the shock and also make some adjustments which leads us to #3.
- Reduce or eliminate penalties – So 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 2018 or can you wait until April 15, 2019 to pay the balance owed? If you owe over $1,000, there are two exceptions that will keep you from owing a penalty. First, you have paid in 90% of the tax you owed for the current year OR 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, 2019. 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% so 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. Using the safe harbor this year is a bit trickier due to the changes that are coming from the TCJA so planning can be helpful to see that you are where you need to be.
- Time Value 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 November and December instead of waiting until March or April. 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.
- 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. It may be the best gift you have given yourself in a long time!
Kathi Koenig | Partner
KKoenig@MHCScpa.com