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Tax Planning

Posted Tue, July 7, 2020

Accurate estimated tax payments come from proper tax planning. There is nothing worse than the fear of the unknown since most human responses will be the worse case scenario. In other words, without proper data resulting from tax planning, people will make us their own data… and it’ll be wrong, and will usually lead to a tax surprise. Another thing that is bad is having cash in the bank, but not knowing how much is yours and how much is Uncle Sam’s. Let’s take the mystery out of the unknown and do some tax planning and dial in those estimated tax payments.

Tax Planning Questionnaire

We have an extensive questionnaire to get the creative juices flowing… which get pumped into our tax planning software-

  • What is your business income after expenses for this year? How about next year?
  • What is your expected salary or wage that will be paid to you and other shareholders?
  • What will be your Roth IRA contribution? Traditional IRA?
  • Will you or do you have a 401k? If so, what will be your contribution? Will there be a company or profit sharing contribution?
  • How much cash can you separate with for retirement planning? $20k? $50k? $100k?
  • Are you paying for health insurance premiums out of pocket? HSA?
  • Does your spouse have income? If so, what is the source and how much?
  • Any other income such as interest, dividends, rental income, etc.?
  • What is your state of residency?
  • Are you and will you qualify as an Ex-Patriate, Foreign Earned Income Exclusion?
  • What is your current business entity? LLC? Partnership? S Corp election?

And these questions are just jumping off points or conversation starters for tax planning. Your unique situation will take us down various roads, and more questions and answers will come up. Also.. and this is important.. we might not arrive at the answer you like or want. But it will be accurate nonetheless, and the sooner you have an answer to sooner you can begin warming up to its consequences (good or bad). Here is a digital form that you can use to get your tax poop into a planning group-

Other questions that we consider- Should you continue with an LLC or leverage an S corporation election? What if you maximize your 401k? What if your spouse quits? What if your W-2 job turns into a consulting gig and is now paid as a 1099? What if you have both W-2 and 1099 income, but the ratio is shifting? Just like Journey, the list goes on and on and on and on..

We can estimate your current year income and tax planning to provide accurate estimated tax payments that will lessen the tax burden next year. Life is all about managing expectations. We typically do this twice a year, once in August and once in November. Read that again! Most CPAs simply hand you a tax return with the next year’s estimated tax payments calculated from historical data. Sure, that works if nothing changes. But things always change! There are two versions of tax planning-

One is the simplified version. This is usually reserved for taxpayers who want to give us their most recent pay stubs and have us annualize the data. If we prepared your prior year tax returns, then tax planning is already included in your fee.

The other one is the what-if version. This is usually reserved for taxpayers who are considering selling a rental, or selling a bunch of employee stock, selling a chunk of their company, or some other transaction that could have major tax consequences. Our fee is usually around $300 to $750 depending on the complexity of the calculation.

If you are an S corporation and you have subscribed to our subscription packages, then simplified tax planning and tax projections are already included in your fee, and is something that we automatically prepare in Q3 and again in Q4 should the situation require. Unpleasant tax news is OK, surprises are bad.

Estimated Tax Payments

If you have non W-2 income such as dividends, capital gains, rental income, K-1 and / or small business income, you might have to make estimated tax payments. You make estimated tax payments for two reasons. First, to avoid underpayment penalties. Second, to help you budget throughout the year. We’re all humans first, and savers second.

As far as underpayment penalties, making estimated tax payments might be required depending on your tax situation. Generally speaking, you are required to pay at least 100% of your prior year tax liability or 90% of your current year tax liability whichever is lower. And if you earn over $150,000, you must pay 110% of your prior year tax liability.

Here are the due dates throughout the year-

Q1 – April 15

Q2 – June 15

Q3 – September 15

Q4 – January 15 (boy how time flies!)

Remember, the U.S. Treasury Department is a business like any other, and they survive on regular cash flows. So, if you needed to make four $2,000 payments, and you write one check on 12/31/2014, you’ll incur an underpayment penalty.

S Corporation Shareholders

As an S Corp shareholder you wear two hats; investor and employee. Employees are easy… you process payroll and the payroll tables homogenize you into statistical data to determine income tax withholdings. Yeah, OK. But, you will also receive a K-1 that shows your ordinary business income (investment income)… however, there is not a withholding component with this income. To make matters worse, your K-1 might be a big chunk. For example, if you make $100,000 net business income, this might be chopped up at $40,000 salary and $60,000 ordinary business income (and taken out as distributions).

What WCG does is pretty cool. We look at your overall household income including all income sources (spouse income, rental income, pension, etc.) and do some tax planning to determine total tax obligations. We then subtract non-S Corp withholding sources to determine a deficit. Next we add a $1,000 to this number to arrive at what we call tax neutrality. Finally, we modify your payroll withholdings to land on this number by the end of the year. For most S corporation shareholders, this elegance eliminates estimated tax payments entirely.

Tax Planning Consultation

Do you have questions on your tax consequence? Did you sell a rental property and are you not sure what you can spend? Are you concerned that your estimated tax payments are incorrect given a bump in net business income? Let’s chat!

We typically schedule a 20-minute complimentary quick chat with one of our Partners or senior Tax Professionals to determine if we are a good fit for each other, and how an engagement with our team looks. Tax returns only? Business advisory? Tax prep, and more importantly tax strategy and planning?

Should we need to schedule an additional consultation, our fee is $250 for 40 minutes. Fun! If we decide to press forward with a Business Advisory or Tax Patrol Services engagement, we will credit the consultation fee towards those services.

Appointments are typically held through Microsoft Teams and are scheduled on weekdays during the work day. Yes, we can easily accommodate nights and weekends, but those are reluctantly agreed to after some eye-rolling and complaining. Additionally, our schedules are more compressed during tax season (who would have thought, right?).

Shockingly we will return all appointment requests via email with 24-36 hours weather-permitting, or perhaps a phone call (if the moment strikes us). No black holes here! In a hurry, please call us at 719-387-9800 or use our chat service in the lower right corner or the button below.

WCG CPAs & Advisors is your tax planning expert and we will work with you to land on tax neutrality next tax season!