Episode #34 – Stop Cringing at Tax Season: A Guide to Year-Round Tax Planning

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Welcome back! As a CPA, there’s been something that’s weighed on my mind for a long time – taxes, but not for the reason you think! Please stick with me.

I’m in the same camp as a majority of people in that I hate paying taxes. But, I also realize as a citizen, if we don’t pay taxes, the consequences are dire for our country. And, don’t get me started about irresponsible spending at all levels of government because that’s not what I want to talk about.

What I really want to talk about is why you should be talking to your tax expert more than once a year.

I have had the same conversation over and over again with friends and prospective clients. It usually starts with “My tax person sucks!”. I ask why? “Because I owed (insert large amount here) this year. I have to find someone else to do my taxes next year because this person does not know what they are doing.”

Here’s the thing – preparing tax returns is not the same as tax planning or tax strategy.  Preparing a tax return is the process of reporting to the government what happened…meaning your financial history from last year. Then, calculating based on your financial history, how much tax you then owe. Determine how much you have already paid toward that tax bill and you either overpaid for the year and get a refund of the overpayment or you did not pay enough and owe more.

While there may have been a box checked incorrectly in the tax program or a number was keyed in incorrectly that is calculating an incorrect tax return, the government puts you 100% responsible for the information reported on your tax return. This responsibility is something you agree to when you sign the form giving the tax preparer permission to e-file your return.

Assuming the tax preparer is competent, the tax preparer is not responsible for decisions you made last year. They are responsible for accurately preparing your return.

What you may be surprised to learn is that tax prep is completely different than tax planning or tax strategy. And, no, this is not a rich person’s flex.  If you own a business or if your tax return includes more than the 2 pages of the Form 1040, you will benefit from meeting with your tax advisor at least once during the year that is not during the tax prep season.

And, yes, this additional meeting will be something that your tax advisor will charge you for but the money you will save and the peace of mind you will get from this meeting will be worth its weight in gold.

Tax offices are preparing a few hundred tax returns within a few months each year per tax preparer on staff. February to April and August to October each year are long hours and long weeks of tedious work. I don’t know many tax preparers who will do a tax planning meeting during the heat of tax season.

Imagine getting confirmation ahead of time what your tax bill will be in April…six months in advance. Giving you time to make an estimated payment that will reduce or eliminate a late payment penalty. Yep – the IRS charges you a penalty if you owe too much of a balance with your return in April. Worse, if you wait to file your return in October, there’s interest added on from the beginning of the year too.

What if you received an inheritance this year? How much will the government tax you? It depends on what you inherited. Some things like life insurance proceeds are not taxable, but an inherited IRA will be taxed. Meeting with your tax advisor during the year will give you time to understand what your taxes will look like when they are filed next year and have the money set aside to pay the tax bill when it’s due.

But are there other things your tax advisor can help with? Yes! Here’s a few things to consider:

1. Contribute to retirement accounts. Max out contributions to tax-advantaged retirement plans like 401ks, SEP IRAs, and Solo 401ks to lower your taxable income. The contribution limits have increased for 2023.
2. Take advantage of business deductions. Deduct all allowable business expenses like office supplies, continuing education, professional dues, utilities, insurance, and allowable home office deductions. Keep detailed records to justify expenses.
3. Buy business equipment. Take advantage of Section 179 expensing to immediately deduct up to $1,160,000 in purchases of equipment like computers, furniture, vehicles, and software. 
4. Delay revenue and accelerate expenses. Consider the timing of billing clients in January 2024 rather than December 2023 to defer income. Also, pay 2023 expenses like bonuses and equipment purchases before December 31st. Depending on your specific situation, the opposite might be a better position for you for 2023 and 2024 combined.
5. Hire your kids. Paying your children reasonable wages for work performed allows you to deduct those expenses. There are limits once kids reach age 18.
6. Contribute to an HSA. If enrolled in a high deductible health plan, contribute the maximum to a health savings account which provides tax deductions plus tax-free growth. The limits are $3,850 for individuals and $7,750 for families.
7. Donate to charity. Get a tax break for donating cash or property to a qualified charity. Consider donating appreciated stock for extra benefits.
8. Harvest investment losses. Sell stocks, bonds, and other investments that have declined in value to realize capital losses you can use to offset capital gains and even up to $3,000 of ordinary income.
9. Evaluate life changes. Get input on major life events like marriage, new children, older kids who are moving out on their own, home purchases, retirement plans, and job changes that affect your taxes. Plan smartly.

That’s 9 things off the top of my head. I’m sure your tax advisor will have more items to consider. 

My overall takeaway for you today is that dropping off or uploading your tax documents to your tax preparer during tax season is not enough. If you have a need to hire someone to prepare your taxes for you, you need to also meet with them at least once if not twice during the year outside of tax season to do a mid-year check up on your tax situation.

Keep in mind that your financial transactions may stay the same each year, but the tax code changes every year. Every year! Something that you have deducted every year for the last 15 years may not be a deduction this year. Don’t get caught off guard. Schedule a meeting with your tax advisor today.

Listener’s Question of the Week

It’s time for our listener’s question of the week! Rob asks, I follow Profit First. I love how in control I am of my money! But, I have some extra money right now in my tax account. Can I use it to pay off my loan? It would leave me a little tight on funds, but I would feel great about paying off this loan that’s been hanging over my head for a few years now.

Hi Rob! I’m glad that Profit First is working for you! I have a follow up question. You said loan, not line of credit, right? If this is a loan and it will leave you in a tight money situation, I would recommend paying down the balance but not paying it off in full. It’s not worth creating some stress around your money if you pay it off too soon. On the other hand, if it is a line of credit that you can take a draw from, then, I would absolutely pay it off and only draw on the line in the future if you need to.

The difference is that with a loan, once the money is paid, you can’t get it back. For a line of credit, that’s money you can borrow and repay over and over during the life of the line. Paying down principal on any debt will reduce your overall interest.

Do you have a question that you would like answered on a future episode of this podcast? Please send it to [email protected].  

Inspirational Quote

This week’s inspirational quote is from anonymous, “What they say: “I don’t have enough time.” What you should hear: “It’s not a priority for me.” What they say: “I don’t have the money.” What you should hear: “It’s not a priority for me.” Lesson: People find both time and money for the things they prioritize.”

Final Thoughts

Final thoughts for today. I hope I’ve provided some insights on the tax world. Despite what you may believe about taxes, there are some situations where you have choices that directly impact your year-end tax bill. Making time to meet with your tax advisor will help you plan and legally lower your tax bill. Many times, decisions need to be made before a transaction happens to prevent a large tax bill and most need to happen within the calendar year – meaning next April is not the time to lower your tax bill for this year’s taxes.

Reach out to your tax preparer today and ask for a tax planning session. I promise that in April, you will thank yourself!

If you have any questions about today's episode please let me know. If you're watching on YouTube, you can comment below or send me an email to [email protected] and if you know someone who might need to hear this information please share this episode with them or if you're on YouTube, you can tag them below. 

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And before I go, remember profit is something you intentionally plan for in the beginning. It is not a potential bonus at the end of the year. 

Thanks, and have a great day.

Are you angry every April – or better yet, you wait until the absolute last minute and file your tax returns every October? Do you purposely avoid thinking about taxes until you really have to? What if I told you there was a better way to manage your emotions about getting your taxes filed? 

To borrow a quote from Schoolhouse Rock – “Knowledge is power.” Today, I’ll share my thoughts on how you can improve your view of getting your taxes done.

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