As we draw closer to the end of the year, it’s the opportune time to discuss the importance of tax planning and how forward-thinking can pay off big when tax time rolls around.
This article will walk you through tax planning, whether you are an individual filing taxes or a business, but also how to find a great certified public accountant (CPA) to assist you as you begin to plan your taxes this year.
The hope is that you can walk away from this article feeling more educated about your taxes and confident that you are taking the right steps to reduce your tax liability and get the most money back on your taxes.
The Role of a CPA in Tax Planning
A CPA should act as your best ally in managing your finances and ensuring that you pay the right amount on your taxes. A good CPA should provide the following:
- Frequent Communication – Effective communication is the cornerstone of any successful relationship, and it is no different when it comes to your CPA. Your CPA should be available to answer your questions, provide guidance, and offer insights into your financial situation. Timely communication can be the key to addressing potential issues before they become major problems.
- Tax Tips – A proactive CPA should provide you with regular tax tips throughout the year as well as updates on changes in tax laws, deductions, and tax credits that might be beneficial to you. Staying informed with the help of your CPA can help you make informed financial decisions year-round.
- Regular Meetings – Your CPA should be willing to meet with you at least twice per year to review your financial situation, discuss changes in your life or business, and adjust your tax plan accordingly.
If you feel your CPA is not meeting your expectations, connect with a CPA that will.
Tax Planning for Business Owners
As a business owner, your goal is to run a profitable business. Paying tax on those profits can be a good thing as it shows your business is doing well, however, those tax liabilities can pile up. The key here is to talk with your CPA frequently so that you can plan for the payments you will need to make.
On the flip side, if you are a profitable business and are looking to minimize your profitability, for taxes, your CPA will help you make sure you are taking the right deductions, utilizing credits, and looking at your business structure to make sure you’re set up correctly.
Other areas to think about around tax times and moving forward for business owners include:
- Proper Business Structure – The way your business is structured can have a significant impact on your tax liability. Your CPA can look at your current structure and make changes if necessary to optimize your tax position. For example, this could involve transitioning from a sole proprietorship to an LLC or exploring other tax-efficient options that would benefit you.
- Exit Planning – All business owners should have an exit plan in place should they decide to retire, sell their business, or pass it on to the next generation. Having an exit plan will help you navigate the tax implications of the transition and ensure that your hard-earned wealth is protected.
Tax Planning for Individuals
As an individual planning for tax time, your list of tax considerations will look quite different from those of a business owner. When planning taxes for individuals, we like to take a look at sources of income, retirement planning, and what steps are being taken to leverage tax-advantaged plans.
When considering your income sources, typically we are going to look at your W-2 earnings and investments. Your CPA can help you navigate how to report these income sources properly and optimize the taxes you pay on them.
The information on the W-4 form is also crucial for individuals to manage their tax liabilities effectively. By accurately completing the form, individuals can make sure they are withholding the correct amount of federal income tax from their paychecks. This helps in avoiding any underpayment penalties or the need to pay a large tax bill at the end of the year.
Retirement is an essential part of your financial journey, even if it may seem like something far off in the future for some. We always recommend that our clients maximize contributions to retirement accounts such as 401(k)s and IRAs. Again, forward-thinking can really pay off.
The last thing to consider is whether you are taking advantage of tax-advantaged plans properly or not. For example, if you have children, consider investing in a 529 plan to save for their education while receiving tax benefits. Additionally, you can explore options like Health Savings Accounts (HSAs) for healthcare expenses, tax credits for electric vehicles, and some home improvements that may qualify you for an energy efficiency credit.
Other Tax Considerations
It is important to keep in mind quarterly tax estimates if you have investments that generate income or own a profitable business.
Quarterly tax payments are due:
- April 15th
- June 15th
- Sept 15th
- Jan 15th
If you are an individual with dividend and/or interest income, you must ensure that you are setting enough aside to cover your tax obligations. Likewise, we recommend profitable business owners set aside at least 30% of their profits to pay quarterly taxes and avoid the possibility of penalties.
Plan Ahead With the Right CPA
We hope this article has helped to highlight that tax planning is not something you should only think about when tax season approaches. Rather, you should think of it as a year-round endeavor that requires a proactive and knowledgeable CPA by your side—a CPA who is willing to educate you about tax planning and financial management.
If you are looking for a CPA or are considering making a change, we would love to speak with you.
At Pasquesi Partners, we strongly believe in focusing on you, the client, and ensuring that you are empowered with the knowledge and strategies to make the best financial decisions possible. Contact us today to schedule a call and find out how we can help you. We look forward to working with you.