Category: Accounting

What Is Income Tax Planning?

What Is Tax Planning?

Tax planning is the analysis of a financial situation or plan from a tax perspective. The purpose of tax planning is to ensure tax efficiency. Through tax planning, all elements of the financial plan work together in the most tax-efficient manner possible. Tax planning is an essential part of an individual investor’s financial plan. Reduction of tax liability and maximizing the ability to contribute to retirement plans are crucial for success.

How Tax Planning Works

Tax planning covers several considerations. Considerations include timing of income, size, and timing of purchases, and planning for other expenditures. Also, the selection of investments and types of retirement plans must complement the tax filing status and deductions to create the best possible outcome.

Key takeaways

• Tax planning is the analysis of finances from a tax perspective, with the purpose of ensuring maximum tax efficiency.
• Considerations of tax planning include timing of income, size, timing of purchases, and planning for expenditures.
• Tax planning strategies can include saving for retirement in an IRA or engaging in tax gain-loss harvesting.

 

Steps Needed for Effective Tax Planning

Ok, tax planning is important. But how can you set up your company in order to take advantage of this planning? Below are five steps needed to create a system of efficient tax analysis.

Bookkeeping – Make sure your startup has a good bookkeeping system in place.  There’s been an explosion in the types of accounting software available, especially for SaaS startups. It used to be that companies would be forced to buy QuickBooks and use it exclusively. While Quickbooks is still the industry standard, it’s not for everyone, and companies can now use is FreshBooks, which is made suited for very small businesses and sole proprietorships, and Xero, for larger businesses.

Getting the right accounting software is important because you’ll conduct all your tax planning analysis from the reports it provides.

Certified Accountant – Establish a relationship with a reputable and certified accountant. In the United States, there’s a job title called a Certified Public Accountant (CPA), and the CPA designation is a standard for a reliable accountant. Find an accountant you trust and meet with them to discuss which bookkeeping software is right for you and get advice about how to efficiently structure your taxes for your business. These accountants will also help with the actual filing of your taxes.

Use a Company Card – This is the best way to separate your business and personal spending. When you’re planning for your taxes, you’ll need to identify company income and expenses, and then strategies on ways to lower your tax liability. If you’re personal and company transactions are mixed, you won’t be able to do this.

If you do end up paying a vendor or making a business purchase with your personal credit card, make sure to keep track of it as an out-of-pocket expense. Don’t wait to take note of it, otherwise you’ll forget about it and won’t get to claim the expense.

Set up a Retirement Plan – Retirement plans are tax deductible and can help minimize a company’s tax burden. Also, young entrepreneurs are often cash-starved and aren’t thinking about their future. Setting up a retirement plan has the added benefit of helping business owners plan for retirement all while reducing the amount of business taxes they pay.

Earmark Money for Taxes – Make sure you’re putting money aside in order to pay future taxes. A lot of startups fail to do this and end up using future earnings to pay for past taxes. It’s a vicious cycle, and one that’s hard to stop.

 

Income Tax Planning

Income taxes are an important component for clients to consider as we work together through the planning process. This resource is provided to help clients understand current federal income tax laws and ways to reduce income tax exposure.

Individual

It is important to understand the income tax laws that apply to individuals. The following information regarding individual income tax laws is intended to educate you on your exposure to income tax liability and potential tax-savings opportunities.

Income, Deductions and Credits

Personal Income and Tax is designed to help you understand how income tax applies to individuals, and Personal Deductions and Credits helps you evaluate whether you are using some of the deductions and credits available to reduce income tax liability.

Retirement Planning

Certain retirement savings vehicles are available to enable you to plan for retirement in a tax-efficient manner. Utilizing Retirement Planning to Reduce Income Tax can help you determine if you are saving for retirement in the most tax-efficient manner, and the Required Minimum Distribution tool can help you assess what income must be distributed from certain qualified retirement plans once you reach age 72.

Tax-Free Exchanges

Deferring Tax Upon the Disposition of Real Estate describes how 1035 exchanges can be used to reduce current income tax liability for certain taxpayers.

Charitable Planning

For clients with a charitable objective, Utilizing Charitable Giving to Reduce Income Tax and Conservation Easements provides preliminary information on how to provide for charity in a tax-efficient manner.

 

Business

An understanding of income tax is a necessary component of ensuring a business is operating efficiently and effectively. Recent changes to the law have drastically impacted how businesses are taxed and created some tax saving opportunities for businesses and business owners. The following is intended to educate you on the income tax liability your business may be exposed to as well as options that may exist to reduce your business’s exposure to income tax liability.

Deductions and Credits

Business Deductions and Credits and Tax Benefits of Research and Development can help you evaluate whether your business is utilizing available deductions. Will Your Pass-Through Benefit from the Reduced Business Tax Rate provides an overview of how the new tax law may impact your taxes, and the Qualified Business Income Estimator helps to calculate whether you might benefit from the new law.

Entity Selection

Taxation of Business Entities provides an overview of how a business’s entity selection can impact taxes. How are C Corporations Taxed? and How are Pass-Through Entities Taxed? provide more detail to help you consider the income tax attributes of your business.

Employment Taxes

An efficient structure can significantly reduce the employment taxes that a business must pay. Using a Common Paymaster to Reduce Taxes provides information on how employment taxes can be reduced for some business owners.

 

Strategies to Consider

You don’t want to pay more in federal income tax than you have to. With that in mind, here are five things to consider when it comes to keeping more of your income.

1. Postpone your income to mitigate your current income tax liability

By deferring (postponing) income to a later year, you may be able to mitigate your current income tax liability and invest the money that you’d otherwise use to pay income taxes. And when you eventually report the income, it’s possible that you’ll be in a lower income tax bracket.

Certain retirement plans can help you postpone the payment of taxes on your earned income. With a traditional 401(k) plan, for example, you contribute part of your salary into the plan, paying income tax only when you later withdraw money from the plan (withdrawals before age 59½ may be subject to a 10 percent penalty tax in addition to regular income tax, unless an exception applies). This allows you to postpone tax on part of your salary and take advantage of the tax-deferred growth of any investment earning

There are many other ways to postpone your taxable income. For instance, you can contribute to a traditional IRA, buy permanent life insurance (the cash value part grows tax deferred), or invest in certain savings bonds. You may want to speak with a tax professional about your tax planning options.

2. Shift income to family members to lower the overall family tax burden

You may also be able to mitigate your federal income taxes by shifting some income to family members who are in a lower tax bracket. For example, if you own stock that produces dividend income, one option might be to gift the stock to your children. After you’ve made the gift, the dividends will represent income to them rather than to you, potentially lowering your family’s overall tax burden. Keep in mind that you can make a tax-free gift of up to $14,000 (the $14,000 limit applies to 2016 and 2017 and could increase in future years) per year per recipient without incurring federal gift tax.

However, look out for the kiddie tax rules. Under these rules, for children under age 18, or children under age 19 (or full-time students under age 24) who don’t earn more than one-half of their financial support, any unearned income over $2,100 (in 2016 and 2017) is taxed at the parent’s marginal tax rate. Also, be sure to check the laws of your state before giving securities to minors.

Other ways of shifting income include hiring a family member for the family business and creating a family limited partnership. Be sure to investigate all of your options carefully before acting.

3. Deduction planning involves proper timing and control over your income

Part of mitigating federal income tax is about taking advantage of all deductions to which you are entitled, and timing them in the most beneficial manner.

As a starting point, you’ll have to decide whether to itemize your deductions or take the standard deduction. Generally, you’ll choose whichever method lowers your taxes the most. If you itemize, be aware that some deductions (for example, medical and miscellaneous expenses) are allowed only to the extent the deduction exceeds some percentage of your adjusted gross income (AGI). Also, an overall limitation on itemized deductions may apply to individuals with high AGIs. In cases where your deductions are affected by your AGI, you might look at ways to potentially increase your allowable deductions by reducing your AGI. To lower your AGI for the year, you can defer part of your income to next year, buy investments that generate tax-exempt income, and contribute as much as you can to qualified retirement plans.

Because you can sometimes control whether a deductible expense falls into the current tax year or the next, you may have some control over the timing of your deduction. If you’re in a higher federal income tax bracket this year than you expect to be in next year, you’ll want to consider accelerating deductions into the current year. You can accelerate deductions by paying deductible expenses and making charitable contributions this year instead of waiting until next.

ACCOUNTANT

What does an accountant do?

Accountants manage money. You’ll deal with financial reporting, budgeting, pay, purchasing, procurement and tax. In some companies, you may also audit financial figures.

As an accountant, you can specialise in different types of accountancy:

management accounting involves forecasting and cost reporting based on a budget – this is a forward looking function

financial accounting involves creating statements for shareholders based on historical information

tax accountants advise businesses and self-employed individuals how to complete their tax forms

What do I need to do to become an accountant?

You do not need a degree to do accountancy, though in some areas it is desirable. You do not need to have taken specific BTECs or A levels, though maths and economics are considered advantageous.

There are a range of different qualifications you can take to become an accountant. The AAT qualification is the minimal level of qualification required for most kinds of accountancy. You can then choose to take higher level qualifications like the ACA, ACCA or CIMA, which will allow you to become a chartered accountant.

Where could I be working?

You may be working for yourself, in a small business or for a large global company.

 

Accounting is More than Crunching Numbers: Read an Accountant Job Description

hero-accounting-is-about-more-than-crunching-numbers-learn-what-other-duties-an-accountant-holds

Perhaps you interact with accountants regularly, or only once a year during tax season. That’s when they’re most visible, but accountants work behind the scenes year-round

If you’ve got a knack for money matters, a career in accounting might make perfect cents. (Sorry—we couldn’t resist!) Read an accounting job description to see where you’ll fit in this diverse career field.

What education or certification will I need to work in accounting?

One unique thing about accounting is that you can enter the field with education at every degree level. An associate’s degree will prepare you for entry-level positions, while a bachelor’s will impart a greater base of knowledge and pave the way for a Master of Business Administration or other advanced degree. Your master’s will usually take one to two years to obtain.

What does an accountant do?

The primary task of accountants, which extends to all the others, is to prepare and examine financial records. They make sure that records are accurate and that taxes are paid properly and on time. Accountants and auditors perform overviews of the financial operations of a business in order to help it run efficiently. They also provide the same services to individuals, helping them create plans of action for improved financial well-being.

What career paths can I take in accounting?

Usually, accountants and auditors work in offices, although some work from home. Auditors may travel to their clients’ workplaces.

 

Key Traits To Look For When You Hire An Accountant

Choosing the right accountants for your business should be more than just about the fee they charge you. While of course we have an interest in telling you ‘hire us’, these are, in our opinion the main things to look out for when choosing an accounting partner, that if chosen carefully, can be with you throughout the lifespan of your business.

Do you feel you could talk to them about anything?

You will need a close relationship with your accountants, with open communication to get the best out of their services. You need to feel you could talk to them about anything, as your personal and business finances are a very private subject. A good accountant will want to understand your wider circumstances for tax planning (read: saving) opportunities, and your personal financial goals.

Are they accountable?

What we really mean here is are they registered with a professional accountancy body? Accountancy qualifications come in all shapes and sizes, and really unless you need an actual audit (i.e. you are a large business with sales over £10million etc – you will then need a ‘Chartered’ accountants who hold an audit licence) it doesn’t really matter which one they have.

Do they understand business in general?

This is very important to support your business. To get the most out of an accountants you will want their experienced eye on your figures. Commercial knowledge, and wider financial awareness are key to them being able to provide you with the most value.

Are they knowledgeable and up to date?

This may be obvious, but you need to have confidence your accountant is up to date with the latest rules and relations. Tax law, and business issues change DAILY, based on actions in the courts

 

reasons why you should become an accountant

You may have heard of the usual reasons to choose a career in accountancy, which include good salaries and the fact it’s a respectable profession. It’s also an ever-changing one. So we’ve listed reasons in this article, which we hope will inspire you to start your career in accountancy this year. Some may surprise you too.

You don’t need to be a maths genius

It’s a common misconception that accountancy is all about maths. In reality, numeracy is important, but it’s only one of a number of required skills. Software does much of the number crunching in today’s accountancy firm, with team members increasingly focused on providing guidance to clients.

You can work in almost any industry

From fashion to entertainment, construction to non-profits, one thing ties (almost) every industry together – they need finance professionals to help manage and advise them.

It’s a great basis for being an entrepreneur

If all businesses need finance professionals, it makes sense for those starting them to have some finance experience themselves. With no need to employ an accountant in the company’s early days, it’s certainly economical – and a fundamental knowledge of how a business’s finances should be structured and maintained will also be crucial to keeping the business profitable.

It’s perfect if you’re an adventurer who wants to live abroad

Accountancy is (arguably) the ultimate portable qualification. Not only are the principles universal, applying the world over, but membership of a body such as ACCA (the Association of Chartered Certified Accountants) is also globally recognised and respected. If you harbour ambitions of moving abroad, an accountancy qualification could be the passport to your dream city.

 

How to Get a Job as an Accountant

If you’re thinking about becoming an accountant or pursuing a career in accounting, it’s important to make sure you have the right education, experience, and background skills before jumping into the field. Here’s a look at some of the key requirements for accountants, including what to expect from an accounting job and how to land the position.

Accountant Education and Licensing

Most accountants complete at least a bachelor’s degree with a focus on accounting. Individuals who want to work for public accounting firms must pass the Certified Public Accountant (CPA) exam.

Almost all states require accountants to acquire at least 150 college credits in order to sit for the CPA exam. In addition to completing an undergraduate degree in accounting or a related discipline, most candidates take additional graduate work, often culminating in an MBA to complete the remaining credits.

Accountant Skills

Accountants work with numbers, so they need to have strong mathematical skills. Accountants should be diligent and detail-oriented, as the job requires combing through volumes of financial data to search for problems and irregularities. Because accounting is governed by various rules and regulations, accountants must be able to learn and apply complex principles that are likely to change over time. If you want to become an accountant, a strong thirst for knowledge will serve you well.

Public accountants audit the finances of a vast array of businesses, governmental entities, and non-profit organizations. They must be able to quickly learn how these operations are conducted and gain familiarity with the specific regulations that apply in these sectors.

Prevent Payroll Errors

Payroll mistakes can be costly. Laws taking effect this year, including the Paycheck Fairness Act and Working Families Flexibility Act, and initiatives such as the IRS’ National Research Program and OSHA’s recordkeeping National Emphasis Program, can result in fines and penalties for errors or noncompliance. The following tips can help your clients avoid common payroll mistakes:

 Apply the latest laws and regulations. Failure to implement federal and state payroll laws can put business owners at risk for over- or underwithholding income tax, underpaying state unemployment taxes, erroneously ceasing child support withholding, or incorrectly calculating fringe benefits.

 Don’t miss a deposit deadline. Deposit requirements are based on the total taxes reported on Form 941 from a four-quarter, look-back period. Clients must make all deposits on time to avoid penalties. The cost of outsourcing payroll to protect against this may be less than the penalty for one missed deposit.

 Process wage garnishments correctly. Employers are responsible for tracking and prioritizing employee wage attachments (for example, garnishments, levies and child support orders) to ensure that withholding and remittances are deducted correctly.

 Don’t put too much reliance on payroll software. Advise clients to periodically audit their payroll process to ensure employee pay and deductions are being entered correctly. Advise clients to download tax tables from the IRS Web site and spot-check employee deductions 

 Classify nonexempt employees correctly. Incorrectly classifying an employee can expose an organization to wage and hour audits, as well as significant penalties and lawsuits. Familiarize your clients with Fair Labor Standards Act guidelines.

 Don’t treat employees as contract workers. Unless specific conditions are met, your clients may be responsible for reporting and paying employment taxes and possibly be liable for back taxes and penalties for employees who are misclassified as independent contractors. Refer to the IRS definition of contract

 

How to Handle Accidentally Over or Underpaying an Employee

It’s every business person’s worst nightmare. Payroll passes and you realize an employee didn’t receive their fair pay. Whether you’ve overpaid or underpaid an employee, coming to a quick and satisfactory resolution is essential. Follow these simple steps to resolve an erroneous payroll discrepancy fast.

Research the Laws

Even if you haven’t experienced a pay discrepancy yet, you should research all government and local laws before you ever run into this mistake. If you fail to pay employees their pre-agreed upon salary, you may be required to follow certain steps to recompense your employee within a specified timeframe. If you overpay employees, on the other hand, you may or may not have the ability to reclaim those funds through payroll. Knowing the laws can help guide how to find a fair solution to an over or underpayment.

Start with federal laws and work your way down to get a solid understanding of what is required to set the situation right. If you find the laws convoluted, consider sitting down with a local lawyer who specializes in labor laws to get a professional assessment of how to handle over or underpayment of employees. While this may cost money upfront, it can save thousands in litigation costs for failing to follow labor laws.

Contact the Employee

The first step in any case of under or overpayment is to contact the employee, if you weren’t alerted to the discrepancy by the employee first. Keeping an open dialog with the employee is pivotal to resolving the issue and ensuring a continued amicable working relationship. If you have accidentally underpaid an employee, work with them to swiftly resolve the discrepancy. Many employees have limited savings and will require that money to pay bills immediately. If you have overpaid an employee, sit down to discuss repayment options. Even if local laws allow you to remove those funds from the employee’s next paycheck, it’s in the best interest of your working relationship to discuss with your employee what amount would constitute a comfortable repayment plan. Keeping transparent with employees about mistakes is essential to quickly resolving the issue.

Collect All Documentation

Once you’ve spoken to the employee and understand the laws you need to follow, collect any documentation available. It may be helpful at this point to also write up an explanation of what occurred with signatures from the employees involved. This creates a clear narrative and allows you to examine and improve the process in the future.  If an employee has already left the company, it may be hard to settle payment issues. Clear and concise documentation can aid in a legal trial to recoup company funds or help former employees to understand the situation and why they are receiving or must pay additional money.

Fix the System

Once the payment issue has been resolved, it’s your responsibility to prevent it from happening again. Payroll software is a great way to ensure that payroll is completed appropriately and can be easily reviewed. Also creating internal checks prior to processing payroll can ensure redundancy that catches clerical mistakes. Focus on the process rather than trying to place blame. If the situation could happen once, it could happen again. It’s imperative to fix the process that precipitated an over or underpayment through automation and policy.  Mistakes happen, even in business. Understanding not only the legal requirements of your business but the ethical requirements is essential towards making sure those mistakes don’t spiral into more expensive and devastating consequences. Use these steps to navigate the uncomfortable situation of over or underpaying an employee.

 

 

When payroll errors happen, there are three primary steps to rectify the situation:

Step 1: Briefly state the error and apologize. When you are delivering the message, begin by concisely stating what happened and apologize. While a written explanation and apology should be sent to each employee, try to follow-up with a face-to-face apology. A personal conversation is usually appreciated and allows employees to share their concerns and ask questions.

Step 2: Describe what caused the error and show the employee exactly how the correct pay should have been calculated. Without excusing the error, describe what caused it (e.g., payroll systems conversion), and then show the inaccurate calculation compared with the correct calculation. Make sure this explanation is clear and straightforward.

Step 3: Explain what steps are being taken to fix the error and to ensure it is not repeated. Employees are eager to find out how the situation will be corrected and want reassurance the error won’t financially burden them. If, for example, the direct deposit was processed a day late, and as a result an employee did not have enough funds in an account to make a monthly payment, the employer should offer to reimburse the employee for any late fees. Furthermore, no one wants a repeat of the error, so it’s up to the employer to find the cause of error and fix it. Describe the cause to employees, and then explain processes that are being added or changed to eliminate the cause. If you are adding audits to make the process more secure, describe those too.

 

Make Expectations Clear

Payroll runs better when everyone is commited to the same goal. Make sure all employees know what is expected of them when it comes to processing payroll. Here are some questions to answer:

• When do hours need to be submitted by? (daily, weekly, etc.)
• How are hours logged and submitted? (desktop app, time tracking mobile app, paper spreadsheet, etc.)
• What other information do employees need to submit? (tasks completed, miles driven, work expenses, etc.)
• What important tax forms do employees need to fill out?
• Who is in charge of approving the submitted hours?

Include these details in an employee handbook, so everyone knows what to do. Employees should feel like they can ask questions about payroll if they are unsure. When you set up strong internal rules such as this, you can enforce them and improve efficiency when processing payroll.

 

How to Manage Payroll

After hiring the very first employee, every company must figure out how to best manage payroll. If payroll processes are disorganized, errors may be made. Payroll errors can be the downfall of a company, causing legal issues and upsetting employees.

Instead of scrambling to figure out a system for payroll, follow these steps to get payroll up and running smoothly.

Step 1: Have Employees Fill out W-4 Forms

W-4 forms detail the number of dependents and allowances that each employee will be claiming. Dependents and allowances reduce the amount of tax that the employee must pay, so the amount of tax that must be withheld from each paycheck changes. Every employee must fill out a W-4 form upon hire.

Step 2: Obtain an EIN

An EIN is an Employer Identification Number, which is required for any business that pays employees. In some states, you must have an EIN for the state as well as a federal one. You can apply for an EIN online with the IRS and through state resource sites.

Step 3: Decide Upon a Payroll Schedule

Paychecks are generally distributed either weekly, bi-weekly, or twice per month. Whatever the schedule you decide upon, be sure to communicate with your employees and stick to the schedule diligently.  Pick a payroll schedule that works well with your revenue cycle and other expenses.

Step 4: Create a System for Calculating Paychecks

The way that paychecks are calculated depends on the structure of your organization. Employees may receive an hourly rate, a salary, commissions, have tips to figure in, get paid by the job or the piece. However payroll will be calculated, putting a system in place to automatically track moneys owed to employees will help when it comes time to process payroll.

Calculating payroll manually can become confusing, so many companies rely on payroll software or a third party payroll company to help. Using software to track time and attendance and other payroll related metrics can simplify payroll even further. The data can be exported to the payroll software or third party for each pay period and paychecks can be calculated automatically.

Step 5: Withhold and Pay Taxes

Every pay period, employers are obligated to withhold the correct amount of taxes from each employee’s paycheck. These taxes must be paid to the appropriate parties, along with a portion from the employer for each employee at certain times of year. Failure to pay on time can result in penalties, so setting up a system to calculate and pay these payments automatically can be very helpful.

Step 6: File Tax Forms and Submit W-2s

Employer federal tax returns must be filed frequently, generally every quarter. State and local taxes may need to be filed regularly, as well, depending on the local regulations. At the end of every year, W-2s must be submitted to each employee.

Payroll software often comes with settings that can be configured to generate the necessary reports. It may even be possible to automatically send these reports to the correct parties with just a few clicks. This can save time and help you to manage your payroll more efficiently  and accurately than with manual systems.

Tax Planning Tips for Various Types of Taxpayers

Investors:Review after-tax returns to evaluate the performance of investments, not your pre-tax results

The impact of taxes in a given year may not be significant. But over time, compounding can have a huge impact on your portfolio’s growth. For example, the difference between a $100,000 portfolio growing after tax at 8% vs. 6% a year amounts to almost $150,000 over 20 years.

Donors: Time your charitable giving to maximize tax savings

By considering current and future income tax rates before giving, you can significantly increase the tax benefit of your charitable gifts. Deductions are more powerful when you’re taxed at a higher rate. So if you expect to be in a higher tax bracket next year, you could save more tax by deferring charitable contributions until 2020. On the other hand, if you expect to be in a lower tax bracket next year, you might benefit from accelerating charitable contributions into 2019. Also, don’t forget you can deduct donations only if you itemize deductions rather than claiming the standard deduction.

Retirees: Choose your source of retirement cash wisely

Generally, it’s best to use money from your taxable accounts first and let your retirement plan assets grow tax-deferred as long as possible. Also, remember that you may benefit from the long-term capital gains rate when you sell assets in taxable accounts, but you’ll be taxed at your higher, ordinary-income rate when you take distributions from traditional IRAs and 401(k)s. So you may want to take retirement plan distributions in years when you’re in a lower income tax bracket. If you must take required minimum distributions, make sure you follow the rules so you avoid penalties.

 

Must Know Tax Planning Tips For Digital Marketers

Charitable Donations

Charitable donations are deductible up to 60% up from 50% for taxpayers who choose to itemize. Appreciated stock donations are also a great tan planning option, as they offsets future capital gains tax liabilities.

Defer Income

Deferring income may make sense for some, because it lowers the current year’s taxable income. Self employed individuals like digital marketers, can delay invoicing and payments until late December in order the receive the income in January the following year. Of course this method does run its risk of pushing you into a higher tax bracket the next year. It is only advisable to utilize this strategy if your are anticipating be in the same tax bracket the following year.

Stock Losses and Capital Gains

The end of the year is the perfect time to dispose of under-performing investments to generate a loss. This helps offset your taxable gains. In addition, you are allowed to deduct $1,500 for individuals or $3,000 for married couples for losses. Any losses over the deductible amount can be carried over to the next year.

Consider Converting Your IRA into a ROTH IRA

Converting a traditional IRA into a ROTH IRA may make financial sense for some. Conversions from a traditional IRA to a ROTH IRA are subject to taxes, however, if you have had a low or negative income year, you can offset business losses with little or no tax. In addition, disbursements from a ROTH IRA are not taxed as long as the account has been open for 5 years and you have reached age 59 ½. For some it may make sense to pay taxes on the money now as opposed to the time of withdrawal. Talk to a tax planning specialist to find out which strategy makes the most sense for you.

Fully Fund Retirement Savings Plan

Fully funding your 401 K or IRA has two benefits. For starters you increase your savings for retirement, and you also reduce your taxable income. The sooner you start contributing the sooner that money can grow and, contributions grow tax deferred. The maximum amount individuals are allowed to contribute to an IRA is $5,500 a year. If you are 50 years old and older you are allowed to contribute an additional $1,000 a year.

 

Tax Planning for Beginners

Planning your deduction method

When completing your tax return, you have a choice between standard or itemized tax deduction methods to determine taxable income. The standard deduction is a dollar amount set by the government that you can claim without accounting for the expenses that typically make up a taxpayer’s allowed deductions. Itemized deductions are actual expenditure you make for deductible expenses. Your actual deductible expenditures in a tax year may amount to more than the standard deduction amount. If that’s the case, you’ll likely pay less tax or get a larger refund using the itemized deduction method. However, the itemized method requires support in the form of receipts and other documents to demonstrate these amounts were actually spent. Consider a filing system to save receipts. Even if you choose to claim the standard deduction, having receipts on file will help you make an informed choice at tax time.

Retirement savings strategies

“Savings plans such as qualified individual retirement arrangements save you tax in the current year, investment earnings grow tax-free year to year, and provide income for retirement, when you may be taxed in a lower bracket,” says James Windsor, certified public accountant from Ann Arbor, Mich. Many taxpayers turn to retirement plans for both the tax reductions now and income later. With a tax rate of 25 percent, for example, contributing $15,000 to a retirement plan may save you $3,750 on your current tax return. Investment earnings on money in your account are not taxed until withdrawal. Maximizing your annual contributions to retirement accounts may be an effective cornerstone for your basic tax planning strategy.

Other tax-sheltered savings

While the size of allowable contributions to retirement plans is attractive to many taxpayers, there are other savings plans that also defer tax and, in some cases, help you avoid tax altogether.

Using tax credits

Another way to reduce the tax you owe is to use tax credits that apply to your situation. Refundable tax credits not only reduce your tax but can be used to create a surplus, resulting in a refund.

 

How to Find the Best Tax Professional for Your Business

Do You Need a Tax Professional?

Everyone has a unique tax situation and a unique perspective on what they need. Some clients want to be 100% hands-off, others want to learn deeply from an expert. In general, people value creating a long-term partner who can provide feedback on their financial health. Someone who doesn’t judge their finances, but works to understand their goals and desires.

Are My Taxes Complicated?

Some may be simple and straightforward, while others may be more complicated. It’s often the questions you’re not asking that create problems down the road when symptoms of bad financial habits or unaddressed tax issues become very apparent.

Navigating the Tax Code

Taxes are complex. On top of financing your business and having the proper structure, navigating the complex landscape that is the tax code is extremely challenging. As a tax professional myself, I can find myself contemplating which interpretation of the Internal Revenue Code is most applicable and can be safely defended for my clients’ businesses. The code was not written with short-term home-sharing or car sharing in mind. So often, a few of us will string together a series of emails on a particular issue, for example, the Schedule C versus E debate for home-sharing and triangulate our views based on different treasury regulations. Coupled with other questions, figuring out how to handle tax — not just a year-end but throughout the year — can be daunting.

Do I Need a Tax Expert?

Working with the right tax advisor should be very beneficial for several reasons. For starters, you can save money on your taxes. Those are savings you can measure in dollars. A tax advisor can help you with a comprehensive tax planning strategy, which can help you save money by timing purchases, timing income, leveraging deductions, and incorporating to lower your tax liability.

Tax Professional vs. Accounting Specialist: Understanding the difference

A tax professional varies from an accounting specialist. While a professional may choose to specialize in both, not all tax professionals or accounting specialists are the same. Some tax professionals choose to focus on tax preparation, while some focus on tax planning and tax compliance. Likewise, some accounting specialists focus on bookkeeping services and don’t handle tax preparation or know the nuances around the code. Just because someone is a CPA, doesn’t necessarily mean they know the tax code.

 

How to choose the best tax preparer

Research Their Qualifications and Credentials

You have to begin somewhere in your search for a professional tax preparer who will help you file your returns accurately and efficiently — and that’s by researching your candidate’s qualifications and credentials.

Ask for References

Because your tax preparer is handling your very sensitive and important financial information, it’s essential to ask for references that can vouch for their work. Anybody can tell you they’re the best in the biz, but it’s wise to hear it from secondary sources so you’re confident that you’re choosing the right person for the job.

Consider Your Circumstances

Not all tax returns are created equal, and as such you should choose a preparer who is adequately educated on how to properly file yours.

Inquire About All Associated Fees Upfront

The last thing you want during an already stressful tax season — especially one where you may not receive a refund and instead owe money — is to be blindsided by fees on the backend of the preparation. To avoid this unwanted surprise, ask about all associated fees upfront. Most preparers offer services at a flat rate per return, Melnik says. As such, you want to avoid preparers who require a percentage of your refund as payment, since there’s a chance they could inflate it to receive a larger fee — and that spells trouble all around.

Ensure That Electronic Filing Is Available

Electronic filing is the easy and quickest way to file your return (and get your refund) these days. But it’s not just the convenience that makes e-filing attractive. It also helps separate the true tax professionals from the amateurs.