Tax Plan Review

Posted Wednesday, January 24, 2024

This explains how to review your Tax Plan. A Tax Plan is a mock tax return using data supplied by you. We understand that for certain professions, such as realtors, predicted income and expenses are difficult to nail down. As such, we do the best we can over summer and then, if necessary, we re-visit in October or November for an update.

Moving on to the meat of the Tax Plan itself-

Income
Line 1, Household salaries and wages (pre-tax 401k deductions will affect this)
Line 2 and 3, Dividend and interest income
Line 7, Capital gains from selling stocks, securities, property, etc.
Line 9, IRA distributions
Line 11, Net biz income from S Corps or Partnerships (also includes rental activity)

Deductions
Line 20, Health insurance deduction
Line 23, IRA deductions
Line 25, Other adjustments (usually HSA)
Line 34, Mortgage interest
Line 42, Qualified Business Income Deduction (QBID)

Taxes
Line 76, Total taxes being paid (yuck) before withholdings and estimated tax payments
Line 77, Income tax withheld (household, including taxes withheld from shareholder salaries)
Line 78, Estimated tax payments
Line 85, Tax due or refund (negative amount)

Please keep in mind that a tax plan is not a filed tax return and therefore does not require NASA precision today. Adding $500 in charity to a tax plan probably won’t move the tax needles too much (but we’ll do it anyway just so you can see). If you believe there are some material differences from our assumptions and your reality, please let us know. Minimizing the gap between assumptions and reality is important.

When reviewing the previous year, we make the following assumptions-

1. Wages are annualized given year-to-date paystubs. Please let us know about future bonuses or other lumps of income.
2. Dividends and Interest will remain the same this year (the planned year) as compared to last year.
3. Capital Gains will be $0, unless you tell us otherwise.
4. IRA Distributions will remain the same, unless the previous year had a one-and-done withdrawal.
5. Mortgage Interest and Property Taxes will remain the same. Buying and selling stuff might affect this, so please let us know.

Should your taxable income change, you can easily determine the tax effect by taking your marginal tax rate found on Line 85 of your tax projection and multiplying it by the change in taxable income. For example, your marginal tax rate is 22% and your taxable income increased by $10,000. Your federal tax liability would increase $2,200. This works the same way for state tax liabilities. However, should your taxable income change by more than 10%, you should contact us since tax credits and other deductions might suddenly be limited making the formula above worthless.

Based on the results of your Tax Plan, we might also update your Payroll Plan. Should that be necessary, a separate email will be sent with updated cash needs numbers and all the other associated payroll information (so, you will receive an email regarding your Tax Plan and another regarding your Payroll Plan).

This election allows you to pay for your individual (personal) state income tax obligation with business funds, and have those payments be deducted on your federal S Corp tax return (and therefore reducing your federal taxable income). Each state has its own regulations regarding this election. You can read more about the PTET deduction (aka SALT work-around) here-

Your Tax Plan might include estimated income tax payments. Our estimated tax payments are designed for your projected income tax liabilities. We do not rely or use the “safe harbor” calculations- these are designed to avoid underpayment penalties… but you still might have a massive surprise in April. What is safe-harbor?

The IRS will not charge you an underpayment penalty if:

• You pay at least 90% of the tax you owe for the current year, or 100% of the tax you owed for the previous tax year, or
• You owe less than $1,000 in tax after subtracting withholdings and credits

If your Adjusted Gross Income (AGI) on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.

Your state will also have estimated tax payment rules that might differ.

Here are some frequently asked questions and answers (you can skip if you have better things to do)-

How often should I update WCG with new income and expenses, or changes to my situation?
If your predicted income changes by more than 10%, or if you have a taxable event such as selling a rental or your primary residence, please let us know right away. We might still defer updating your Tax Plan until a later date, but we will create an internal task so that life doesn’t get in the way, and we all forget to circle back on the update.

I noticed my charitable donations is too low by $500. Should we update?
While an accurate Tax Plan is critical, we have to be mindful of materiality and try not to get too caught up in small changes. We understand that it is difficult for our clients to know what is material. Therefore, please let us know about these tweaks, but please also understand that we might not update the Tax Plan unless we believe there is a material or substantial change in tax liabilities.

What is “tax neutrality?”
We tax plan for a $1,000 refund from the IRS and $500 from the state, should you have a state in your tax footprint that has an income tax. It is a buffer of sorts for minor fluctuations in planned numbers and actual numbers. Should you want a different tax consequence, we can plan for that too. For example, your spouse might owe back taxes to the IRS- we can plan for a “tax due” situation so refunds are not confiscated.

I am short on cash right now with a house purchase. Can we change withholdings or estimated tax payments?
Of course! Owing taxes on your tax returns is not a bad thing as long as we have planned for it, and you know the bill is coming. As stated elsewhere, we want to avoid surprises.

Here are some helpful resources when thinking about your Tax Plan-

WCG CPAs & Advisors is a full service consultation and tax preparation firm, and we look forward to working with you!