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Your Tax Planning Should Be a Year-Round Occurrence

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Your Tax Planning Should Be a Year-Round Occurrence

So long June gloom, hello Street $ense! If there is one aspect of personal finance that should be left to the experts, it’s taxes. We know, for many of you, tax season is soooo… last season. But, for others, tax preparation continues and, according to CPA Lisa Johnson, tax planning should be a year-round occurrence. From deciding who will prepare your taxes to making tax-saving moves, we asked Lisa the most common questions we receive from clients and she told us everything she wants you to know. 

Q: Who is a candidate for tax preparers such as H&R Block?

A: H&R block makes sense if you fit within their box. To be in their box you should really have a W-2 job, light itemized deductions or the standard deduction, a small investment account and maybe one K-1. If you fit within this box, tax preparers will be cost effective and the job will be adequate for your needs. If you have anything more complicated like a business, you may want to consider a CPA. 

Q:  When does it make sense to use a CPA and pay more?

A:  Examples of situations that make tax filing more complicated and worthy of a CPA include business or real estate ownership, inherited assets, investment accounts, partnership or other passive income, death or the need to make quarterly estimated tax payments. Many of these situations call for not just tax preparation, but tax planning. Tax planning is the most important reason to hire a CPA that is fully versed on complex tax law. To keep you out of trouble, avoid penalties and potentially even save on taxes, the extra cost of a CPA is worth it.

Q:  What are the biggest tax mistakes that you see people make?

A:  Waiting until the end of the year to plan and not coordinating all parts of their financial lives. Waiting until December to do tax planning limits options and makes it difficult to fix issues before they cause major headaches down the road. I recommend engaging a CPA in September or October to provide more flexibility and opportunity to limit taxes. As a professional, I see the results of all tax-related moves made during a year. We can often reduce taxes if the investment advisor, attorney and tax professional all work together before moves are made.

Q:  What are some simple tax moves to help lower tax?

A:  On the practical side, if you aren’t subject to the AMT (Alternative Minimum Tax), you could consider paying your fourth quarter state estimated payment and/or your April property taxes before the end of the year. This will increase your itemized deductions.

For sole proprietors, be sure to keep track of your auto expenses and your home office expenses to help reduce net income. Also, be sure to understand the rules around independent contractors and employees in the state of California as the penalty is steep for miscategorizing an employee. If you have an independent contractor, be sure to actually give them a 1099 so you can deduct the income you paid to them. If you are on a tight budget, you can purchase software at Staples to prepare the 1099 yourself.  

Q:  What do you find yourself repeating to clients that you would like everyone to remember?

A:  To my business owner clients, I am constantly repeating: build wealth outside of your company. I understand that the business might produce a large return on investment, but, investing some of the assets along the way in a more liquid and diversified investment portfolio will create an additional retirement resource. Having all of your assets tied up in your business is a lot like having all your eggs in one basket. Investing in one company is risky, even when it’s your own. I’ve seen too many business markets decline and not produce what the owner needs, often before retirement. Consider pulling cash out of the business over the years and investing it in a portfolio over time. 

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