Looking Back — and Ahead
April 15 has come and gone, and many people are not looking back on the recent tax season with fond memories. Indeed, for many there were surprises and refunds lower than expected. One of the keys to not being surprised or disappointed is planning, as in year-round planning.
By Danielle Fitzpatrick, CPA
Many taxpayers think about taxes only once a year, and that one time is when they are filing their income-tax return. However, taxpayers should be thinking about their taxes year-round.
Many people do not consider how a change in their life may affect their taxes until they see the outcome the following year. Surprises may be avoided if they were to seek the advice of their tax professional ahead of time.
Seeking the advice of a tax professional throughout the year is very important. Certified public accountants (CPAs) who specialize in tax are not just tax preparers. CPAs can be trusted advisors who can help meet your personal wealth-creation, business-management, and financial goals.
The 2018 tax-filing season brought some of the biggest tax-law changes that we’ve seen in more than 30 years, and left many taxpayers surprised with their tax outcome. Perhaps you were pleasantly surprised by the additional money you received because you have children, or maybe you were one of the many who were shocked because of the reduced refunds or liability that you owed for the very first time.
If you were unhappy with the results of your 2018 tax return, you now have an opportunity to plan for the future. Review your 2018 income-tax return and determine if changes need to be made. Did you owe money for the first time because your withholdings decreased too much, or because you are now taking the standard deduction due to the loss of several itemized deductions?
Consider this — if your income and deductions were to remain relatively the same in 2019 as they were in 2018, would you be happy with your results, or do you wish they were different?
“If you were unhappy with the results of your 2018 tax return, you now have an opportunity to plan for the future.”
After you have looked at your 2018 income-tax return, you should then consider what changes may need to occur in 2019. Your tax accountant can help you determine how an expected change can impact your tax liability and try to ensure that you are safe-harbored from potential underpayment penalties.
Individuals may be subject to underpayment penalties on both their federal and state returns if they do not meet specific payment requirements each year through withholdings and/or estimated tax payments. Your accountant can also help you determine if a change in withholdings at work or through your retirement is necessary, or whether there is a need to adjust or make estimated tax payments.
These changes can help you avoid, or reduce, any potential underpayment penalties.
There are so many changes in a person’s life that could impact their tax return. Some changes include, but are not limited to, getting married or divorced, having a baby, sending a child to college, retiring, or starting a new job.
Maybe you have decided to start your own business and now are responsible for self-employment tax. Or maybe you have decided that you need to sell that rental property or second home you have had for many years. Perhaps you are a beneficiary of an estate for a loved one who passed away or have decided to sell stock through your investments. These are all examples of changes that could significantly impact your taxes.
Businesses also experience changes that could have an impact on their business returns. These changes include, but are not limited to, purchasing or selling a business, investing in a new vehicle or piece of equipment, or maybe the company has grown and you want to start providing benefits to your employees.
All the above examples could have a major impact on your individual or business income-tax returns, and that impact could be reduced if you were to reach out to a tax professional for advice before the next tax season. Besides the changes briefly mentioned above, here are two lists of questions (personal and business) that may be helpful in your next discussion with your tax professional.
First, some questions to ask your accountant in relation to your personal taxes:
• How much should I be contributing to my retirement, and which type of retirement best suits my needs?
• Am I adequately saving for my children’s education, and should I consider an education savings plan?
• Do I have adequate health, disability, and life insurance?
• When should I start taking Social Security benefits?
• When do I sign up for Medicare?
• Have I properly planned for Medicaid?
• Do I need a will, or when should my existing will be updated?
• Should I consider a living trust?
• Are my bank accounts, retirement accounts, and investment accounts set up appropriately so they avoid probate if I pass away?
• Are my withholdings and/or estimated tax payments adequate?
• When should I sell my rental property, and how much should I expect to pay in taxes?
• Can I still claim my child as a dependent even though they are no longer a full-time student?
• I’m inheriting money from a loved one who passed away; will this affect my taxes?
• I’m thinking about starting my own business; how will this impact my taxes going forward?
• My financial advisor told me I would have significant capital gains; how will this affect my tax liability?
Here are some questions to ask your accountant in relation to your business:
• What business structure is most appropriate for my circumstances?
• How do I know if my business is generating a profit?
• Am I pricing my products and services properly?
• How would my business function if my bookkeeper left tomorrow?
• What controls should I have in place to prevent employees from misusing company funds?
• Should I upgrade my accounting software?
• Do I need compiled, reviewed, or audited financial statements?
• Are my withholdings and/or estimated tax payments adequate?
• Can I claim a deduction for an office in my home?
• Should I buy a new truck or equipment before year-end?
• Should I buy or lease a vehicle?
• Should I implement a retirement plan before year-end?
• What is the overall value of my business?
• What should my exit strategy be?
• What are the tax consequences of selling my business?
Whether you are experiencing a major change in your life or want to plan for your future, do not forget to reach out to your tax professional to determine how it may affect your income taxes. u
Danielle Fitzpatrick, CPA, is a tax manager at Melanson Heath. She is part of the Commercial Services Department and is based out of the Greenfield office. Her areas of expertise include individual income taxes and planning, as well as nonprofit taxes. She also works with many businesses, helping with corporate and partnership taxes and planning