Being a tax consultant and preparer for over 20 years, I can tell you that there have been a number of times that I've had clients who were surprised by how much they money they owed at tax time. Why did they wind up owing so much money? There are numerous reasons. What it all comes down to tax planning or the lack of.
Tax planning is very similar to financial planning. It involves taking a close look at your tax situation from one year to the next. People who have financial investments are always checking with their financial advisors to improve their financial situation. If you're going to check with your financial advisor, you should also check with your tax advisor and so see how your financial investments are going to affect your taxes.
Tax planning is not only for those people with financial investments. Tax planning is for everyone, especially if you're undergoing financial changes that could affect your tax situation. Some of these financial changes could be the purchasing of a home, it could be the purchase or sale of rental property, it may be the withdrawal of money from a retirement account, or it may be starting a business. Anyone of those financial changes as well as others could significantly affect your tax situation.
The best time to check with your accountant is before you take any kind of financial action to see how it could affect your taxes. Many times people call their accountant after the fact. That's like closing the door after the horse has left the barn.
There are two things that I always tell my clients. First, I always tell them if that if they have any tax questions to call me. The second thing I tell them is if they are going to do anything that they think could affect their taxes to contact me.
Why is it important to check with your accountant before you do something? It's important because your accountant can advise you of the tax consequences of your actions. They can analyze your tax situation and tell you what action to take so you don't get caught owing a lot of money at tax time.
Here's a story that I always tell my clients to emphasize this point. Several years ago I had a client who took money out of retirement account (which was fully taxable) in late December. I was not aware of this action until he came to see me at tax time. As a result, he ended up owing a lot more money than he anticipated.
I told my client that I wish he had consulted with me prior to making the withdrawal, because I would have advised him to wait until January to take the out the money. Why should he have waited? By waiting until January, the money he withdrew would not have been taxable until the following year. By waiting a few weeks to the next year, we could have done tax planning on ways to reduce his taxes during the year and save him some money. This is why it's important to consult with your accountant during the year.
Tax planning is also important when it comes to paying your taxes. Many people are under the assumption that they have until April 15th to pay their income tax. That is not entirely correct. April 15th is date when your taxes must be paid in full.
The law requires that you pay your taxes as your earn the money during the year. For those of you who are paid as employees, you have your taxes withheld from your paychecks. Your employer withholds the income tax from your paycheck and he pays that money to the government throughout the year. However, for those of you who are self-employed (work for yourselves) or have passive income from investments, you may be required to pay your taxes during the year by making estimated tax payments.
What are estimated tax payments? Estimated tax payments are quarterly tax payments made throughout the tax year (January through December). The law requires that you make an estimate of your tax liability and pay it as you go during the year. The tax laws require that you make your payments on April 15th, June 15th, September 15th and January 15 (of the following year).
The tax laws allow you to base your estimate on your prior year's tax. If you income is basically the same year after year you can do this. However, if your income and tax situation changes from year to year you should consult with your accountant when it comes to estimating your taxes. The IRS has a publication on Estimated Income Tax, it's Publication No. 505 and you can download it for free from the IRS website, http://www.irs.gov.
Tax planning should be done during the year. It should be done by those of you who are self-employed or have passive income from investments, because your income can fluctuate from year to year. For those of you who undergo any financial changes which could affect your tax situation during the year, you should consult your accountant or tax advisor. Tax planning is important because can save you quite a bit of money come tax time.
The Author: Larry Zinamon has been involved with taxes for over 35 years. He is a registered tax preparer and authorized e-filer with the IRS. Larry has had his own tax consulting and preparation business for over 20 years. Prior to starting his own business, Larry worked for the IRS. During his 14 years with them, he worked as a Revenue Officer, Taxpayer Service Specialist and Tax Examiner. Within the past couple of years, Larry has been doing some network marketing.
By: Larry Zinamon
