Posted September 15, 2018
Tax Planning is critical. There is nothing worse than the fear of the unknown since most human responses will be the worse case scenario. 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 projections.
Tax Projection Worksheets
We have an extensive questionnaire to get the creative juices flowing-
- 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?
And these questions are just jumping off points or conversation starters. 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 fillable PDF 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 create an S Corp? What if you maximize your 401k? What if your spouse quits? What if your W2 job turns into a consulting gig and is now paid as a 1099? What if you have both W2 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 2018 income to provide a very accurate tax consequence expectation come tax time next year. Life is all about managing expectations. We typically do this twice a year, once in August and once in November. There are two versions of tax planning-
One is the quickie 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 2017 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, or some other transaction that could have major tax consequences. Our fee is usually around $300 to $400 depending on the complexity of the calculation.
If you are an S corporation and you have subscribed to our subscription packages, then tax planning and tax projections are already included in your fee, and is something that we automatically prepare in Q3 and Q4. Unpleasant tax news is OK, surprises are bad.
Tax Cuts and Jobs Act of 2017, Section 199A
How will the changes in the tax code affect you? There are a ton of variables that have changed- marginal tax rates, no exemptions for dependents, higher standard deduction, SALT limitations, etc.
Click on the buttons below to read about the new tax reform changes including the Section 199A Qualified Business Income Deduction (QBID), the death of Meals and Entertainment as we see it and some mock 2017 tax returns showing a side-by-side comparison to 2018 under the new rules, especially aimed at business owners.
Estimated Tax Payments
If you have non W2 income such as dividends, K1 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.
Estimated Tax Payments Deadlines
In addition, estimated tax payments aren’t necessarily budgeting tools- if you expect to earn more, you should pay more throughout the year if you aren’t a good saver or hate writing a big fat check on April 15, or both. 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 US 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 Corp and Other W-2 Income Situations
So, when computing your estimated tax liability for the quarter you must include the taxes (income and employment taxes) that will be withheld from your paycheck. For example, your quarterly estimated tax payment is $5,000. If you run payroll, and $2,500 is being withheld for taxes, then you should also send in $2,500 as a quarterly estimated tax payment.
In other words, you are essentially making estimated tax payments in two ways (a) through payroll taxes withheld and paid by the company on your behalf, and (b) through payments made by you personally. We can help with the mental gymnastics. There are some other devils are in the details especially between first-year S-Corps and established S-Corps.
The same is true if you run a small business yet have other W-2 income. If you are required to make estimated payments for the income generated by your small business, your estimated payments might need to be adjusted depending on your withholdings and tax liabilities.
Let us know how we can help plan and budget your tax consequences!