I owe how much in taxes?
I could feel the horror on the other end of the phone after they learned they owned hundreds of thousands more in taxes.
The only way to avoid these situations is with proactive tax planning.
Proactive tax planning is the actions we take over the course of the year to avoid any surprises when implementing tax planning strategies for business owners.
In this blog, we are going to give you a roadmap for proactive tax planning.
Proactive Tax Planning
I love surprises, but I don't like tax surprises.
I have yet to meet a business owner who wants any surprises when it comes to taxes.
In this blog, we are going to show you how to be proactive.
We will be looking at three key areas.
What work should be done on a quarterly basis?
What work should be done on an annual basis?
Let's Dive in.
Quarterly Basis
They say consistency is key. This couldn't be any more true when it comes to tax planning
Here are two things you should do each quarter to avoid surprises.
Review of Business Financials:
You will want to get into your books each quarter to review how things have been going. I regularly see business owners make the mistake of not looking at the books regularly and this gets them in trouble. If you don't know how you are doing it makes it difficult to know what decisions to make.
Looking at your books regularly will help you make better business decisions later on in the year. A common issue I see with business owners is waiting until the end of the year and then deciding to buy anything they can for their business to reduce their taxes. Although this is a viable strategy it is reactive and not proactive.
The way you plan for this in advance is by reviewing your books on a quarterly basis.
Quarterly Estimates:
After you review your financials in the business it is time to review your quarterly estimates. Before we dive into what you need to pay let's first look at what is a quarterly estimate.
There are two ways you typically pay your taxes for the year. The first is through your salary with normal withholding. The second is through estimates.
This is where you pay the amount of tax you expect to owe based on the profits for each quarter. This is important for two key reasons.
To avoid penalties and interest on taxes owed.
To avoid a big surprise at the end of the year
The big mistake to avoid is simply paying your quarterly estimates based on last year's profit. You can avoid this by reviewing your books each quarter. That way you don't end up paying too much in estimates or too little in estimates.
So when should you pay these estimates? Each quarter there is a due date for the estimates.
April 15th
June 15th
September 15th
January 15th
One of the biggest questions we get is how to avoid penalties and interest. The key here is knowing how the IRS treats each type of withholding.
Quarterly estimates are treated as paid only at the time in the year the estimate is made while normal withholding is spread throughout the course of the year. The trick here is to make sure you are paying estimates when you earn the income or withholding extra funds through payroll at the end of the year.
Annual Basis
Proactive planning happens at different times during the course of the year. Now that we have reviewed the quarterly proactive planning we will look at the annual planning.
Annual planning covers the topics that need to be completed at one point during the year. Here are the top three planning moves to stay proactive with your tax situation.
Annual contributions to retirement accounts.
Providing tax forms to your CPA firm
Annual Review of your tax return
Let's dive into our first area.
Annual contributions to retirement accounts:
Every year there will be deadlines for different retirement accounts. The first step is knowing which accounts to contribute to, but in this blog, we are going to look at the key dates for each of these retirement accounts.
There are three key dates for retirement accounts that must be known to be proactive.
April 15th
At the tax deadline, there will be multiple accounts that you must finalize your contributions. These accounts include the following
Roth Individual Retirement Accounts
Traditional Retirement Accounts
Solo 401(K) Retirement Accounts
Health Savings Accounts
October 15th
When you file an extension for your taxes you have until the 15th to finalize your return. There is also one accounts that allows you to make a retirement account contribution for the previous year prior to the October 15th deadline.
Self-Employed Pension Retirement Account
This account is specific for those with self-employment income.
December 31st
The last day of the year is when you can finalize contributions for the following accounts.
Traditional 401(K) Retirement Accounts
Roth 401(K) Retirement Accounts
Opening a Solo 401(K) Retirement Account
Note that for those looking to make a solo 401(K) contribution, this account must be opened prior to the end of the year you plan to make the contribution.
Providing Tax forms to CPA Firm
Being proactive requires you to be looking ahead. If you are lucky enough to have a tax planner and not a tax preparer you will find this section to be easier to implement.
Once a year for clients it is required to gather all tax documents and provide them to your CPA. This can be tricky when you are making tax moves during the year.
Our goal with the annual tax letter is to outline to your tax team what moves were made during the course of the year and what tax forms to expect.
Tax Moves
Outlining the tax moves is key to ensuring your CPA is critically thinking about your tax return. Often clients get in trouble when they blindly provide information to their CPA without context. Context is key to communicating tax moves to your CPA.
Tax Letter
Annually in the 1st quarter of everywhere we need to provide a tax letter to your CPA. In this tax letter, we will outline all the forms they should expect to receive from us along with any form we know of that we don’t have access to.
Outside checking accounts
Outside investment accounts
This tax letter is a key part of helping give context to your CPA team.
Once your CPA gets this information is it enough to assume everything is done accurately? No. CPA's are humans and humans make mistakes. It is our job to provide a second set of eyes to the expert work completed by your tax team.
Annual Review of Tax Return
On an annual basis, we need to review your previous year's tax return. This review will give you a second set of eyes to ensure all your information was reported properly.
Here is an example of the output we provide to each of our clients when reviewing their tax returns on an annual basis.
These are the key considerations we are looking for when completing a review of a client's tax return.
Accurate Information
You would be amazed at how many returns we have reviewed that have incorrect information.
The most common issues we see are inaccurate cost basis for sales of securities and children missing off of tax returns.
Both of these could cost a client thousands in taxes if done incorrectly.
Retirement Account Contributions
Another issue we commonly see is inaccurate information surrounding a client's retirement account contributions. It is not uncommon to see a 401(K) contribution missed or other deduction.
Review of Quarterly Estimates
Typically on your tax return your CPA will provide quarterly estimates for the current year. Although these can be accurate they often need to be adjusted. During the course of our review, we will look to see what we recommend and take this into consideration when we work to complete the quarterly estimates for your family.
Tax considerations are an ever-changing target for business owners. It is a never-ending chase to minimize taxes both today and in the future.
Your financial advisor should work hand in hand with your tax team to ensure you are minimizing these taxes.
When was the last time your advisor asked to review your tax return?
Can you even remember or maybe it is never?
If this is the case for you reach out to our moment team to get a free review of your tax return at no cost.
If you are a business owner who is looking to find a financial team that specializes in you, schedule a call, and talk with a Moment founder.
Not sure what questions to ask, check out this video on 10 questions you should ask when interviewing a financial advisor.
Get in Touch With An Advisor
Frequently Asked Questions
Here are some answers to questions I received frequently about this topic.
Are you a fiduciary? Moment Private Wealth serves clients as a fiduciary 100% of the time.
How does Moment Private Wealth make money? We are only paid in one transparent way, by our clients. We receive no kickbacks or participate in any profit-sharing arrangements. Our fees are simple, transparent, and clear for our clients.
How are you different than other financial advisors? We are specialists in working with professional athletes and business owners. We limit the number of new clients we take on. This allows us to provide unparalleled value and highly personalized service to professional athletes and business owners. We work as a team to service our clients. We believe in building a team of “A” players. This ensures our clients receive world-class tax, estate, insurance, and investment strategies. We focus on educating first, then executing.
Where do you hold my investments and how can I see them? Moment Private Wealth uses Fidelity Investments as a third-party custodian for our client investment accounts. As a third-party custodian, Fidelity safeguards and provides reporting to you and the IRS each year. Clients can also access all financial information via the Moment Private Wealth Client Portal.
How do you work with other members of my team? We believe in the power of the team. Our client teams consist of Moment Private Wealth, an accountant, an attorney, a banker, and an insurance specialist. We help our clients build out their team of individuals or work with existing partners clients have. Our goal is to ensure every family has a team of experts to protect their interests.
What is a tax deduction? A tax deduction is your ability to reduce your total income by the amount of your deduction. For every dollar of deductions, you will reduce your taxable income by a dollar.
How to avoid a big tax bill? To avoid a tax bill you need to be proactive with your tax planning strategies. This will require your team to work on your taxes throughout the year. You should be looking at taxes on a quarterly and annual basis.
How to pay less in taxes as a business owner? Taxes are going to be your largest lifetime expense. Our goal is to help you pay the least amount possible and never leave the IRS a tip. Our team of specialists understands this and works to reduce your taxes today and in the future.
How do taxes work as a business owner? When you own a business you are going to get taxed in two ways. First, you will be taxed as an employee through the W2 wages you take from the business. Second, you will be taxed on the profits that your business earns.
What are the best tax strategies for business owners? The best tax strategies can save you thousands if not millions in taxes. The best strategies will be specific to your needs and goals. Strategies most business owners consider take into account what they expect to make in income this year as well as in future years.
*Moment Private Wealth offers information on tax and estate planning that is general in nature. Tax and Legal advice are not provided by Moment Private Wealth. Consult an attorney or tax professional regarding your specific legal or tax situation.
