Category: Accounting

What is strategic tax planning?

Tax Planning Defined

You have a business venture and it is making money. Your accountant projects your income and the corresponding tax that you will have to pay. You are hesitant to shell out cash to pay your tax liability. So, you schedule a tax consultation with your accountant. The accountant can make suggestions on ways to legally reduce your expected tax liability. That is called tax planning.

Tax planning is commonly defined as the manner of forecasting your tax liability and creating circumstances and ways to reduce it. Tax planning involves the analysis of your financial situation from a tax perspective with the end view of tax efficiency. However, tax planning should not be confused with tax avoidance as the latter includes ways to use tax laws that are not intended by Congress. On the other hand, when you use tax laws to reduce your tax payable in a legal manner that abides by the tax laws, it is referred to as tax planning.

Steps for Tax Planning

1. Start Early

Most people do their taxes in March or April when the deadline for filing tax returns is approaching. If you don’t start making decisions that can reduce your tax bill until after December 31 or the year-end, you will be stuck with your current tax liability. Thus, it is highly encouraged that tax planning should start early to give you more time to make a good estimate of your investment gains or losses and income. The earlier you can get this information the more time you have to do something about it.

For example, you have an expected gain from an investment. This gain will put your total income within a higher tax bracket than the previous year, resulting in a higher tax. But, given that you have determined an estimate of your total income, you are able to plan out some deductions to put your income back into a lower threshold.

2. Assess Tax Liability

Tax liability is the amount of tax payable based on current and applicable tax laws. An event or transaction that results in a tax consequence triggers the calculation of the tax liability. The calculation is done by multiplying the applicable tax rate on your determined tax base. The tax base could either be your income or asset balance during the period. The resulting product will be your taxable amount for the tax period. Having a certain estimate of your tax payable is helpful for working toward a plan that results in savings. The amount of tax liability computed previously will allow you to determine how much to invest to save on tax.

3. Profile Risk Level

Since tax planning includes investment mechanisms designed to reduce your tax liability, it is important that you do risk profiling. It is a process of finding an optimal level of investment risk that your current financial situation and other personal circumstances may permit.

To come up with a risk profile, you need to consider the following:

1. Risk Required: the risk associated with the return you want to achieve
2. Risk Capacity: the level of risk that you can afford to take
3. Risk Tolerance: the risk level that you are comfortable with

These characteristics must be assessed separately and compared to one another to come up with a trade-off decision to achieve optimum results.

 

Understanding Your Tax Basics

No matter what the season or your unique circumstances, when it comes to your taxes, planning usually pays off in a lower tax bill. The following is provided so that you may have a basic understanding of taxes before you discuss filing options and strategies.

Filing Status – Except for a surviving spouse, or married individuals who have lived apart for the entire year, your filing status depends on your marital status at the end of the tax year. Generally, if you are married at the end of the tax year, you have three possible filing status options: Married Filing Jointly, Married Filing Separate, or if you qualify, Head of Household. If you were unmarried at the end of the year, you would file as Single status, unless you qualify for the more beneficial Head of Household status.

Head of Household is the most complicated filing status to qualify for and is frequently overlooked as well as incorrectly claimed. Generally, the taxpayer must be unmarried AND:

• Pay more than one half of the cost of maintaining as his or her home a household which is the principal place of abode for more than one half the year of a qualifying child, or an individual (relative) for whom the taxpayer may claim a dependency exemption, or
• Pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year.

A married taxpayer may be considered unmarried for the purpose of qualifying for the Head of Household status if the spouses were separated for at least the last six months of the year, provided the taxpayer maintained a home for a dependent child for over half the year.

Surviving Spouse (also referred to as Qualifying Widow or Widower) is a rarely used status for a taxpayer whose spouse died in one of the prior two years and who has a dependent child at home. The joint tax rates are used, but no exemption is claimed for the deceased spouse. In the year the spouse passed away, the surviving spouse would file jointly with the deceased spouse if not remarried by the end of the year.

Adjusted Gross Income (AGI) – AGI is the acronym for Adjusted Gross Income. AGI is generally the sum of a taxpayer’s income less specific subtractions called adjustments (but before the standard or itemized deductions and exemptions). Many tax benefits and allowances, such as credits, certain adjustments and some deductions are limited by a taxpayer’s AGI.

Taxable Income – Taxable income is your AGI less deductions (either standard or itemized) and your exemptions. Your taxable income is what your regular tax is based upon using either the IRS tax tables or the tax rate schedule.

Marginal Tax Rate – Not all of your income is taxed at the same rate. The amount equal to the sum of your deductions and exemptions is not taxed at all. The next increment is taxed at 10%, then 15%, etc., until you reach the maximum tax rate. When you hear people discussing tax bracket, they are referring to the marginal tax rate. Knowing your marginal rate is important, because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your marginal rate is 25% and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $250 in Federal tax ($1,000 x 25%). Your marginal tax bracket depends upon your filing status and taxable income. Find your marginal tax rate using the table below.

 

What is the strategic tax planning process?

Every business has a story and it’s important for a strategic tax planning professional to understand a business’s situation and goals. That unique narrative informs the professional on how to structure the tax advisement.

Below is what can be expected during the strategic tax planning process:

• Basic information about the business is gathered to determine project feasibility. It includes the recent income statement and balance sheet; first five pages of the most recent corporate tax return and personal tax return for the owners; current fiscal year projections; and ownership structure.
• Once the engagement commences, more detailed information is analyzed. It includes 3 years of corporate and personal tax returns; 3 years of business financial statements; estate planning documents such as wills, trust etc.; an employee census; any buy / sell agreements or other succession plans currently in place between the owners; tax returns of any affiliated entities; personal financial statements for each owner; real property depreciation schedule, etc.
• Strategy is developed. After all the information has been analyzed, the strategy is developed, and several reports are created which detail the strategy and recommendation.
• The comprehensive report is presented. The strategic tax planning professionals present the reports that detail the strategies, all of which are supported by law. The professionals will then work with the business to ensure proper implementation of the strategies.

The strategic tax planning process and strategy development provide a holistic approach to look forward to determine how a business can enhance its tax efficiency. Is strategic tax planning a process that’s right for your business?

 

Strategic vs. Tactical Tax Planning

If you search online for “tax planning” advice, you get a lot of information on the tactical management of tax benefits and tax obligations. Hundreds of “Tax Planners” and postings about tax planning pop up like mushrooms in the forest after a rain. The majority of them have one focus: Tactical Tax Planning. Most of them are too simplistic to capture the wide range of issues involved in tax planning matters that demand strategic thinking.

Tactical tax planning focuses on the hear-and-now, and usually deals with annual tax juggling issues. It involves questions like:

• What everyday expenses are deductible?
• Which method should you use to track and deduct car expenses?
• For what did you use the funds taken from your home equity line of credit?
• Do you need to make estimated tax payments?
• For which tax credits do you currently qualify?
• Will your adjusted gross income trigger the Alternative Minimum Tax?

Strategic tax planning, however, takes a longer view of your financial situation, and is not bound by the constraints of annual tax return filing deadlines. As an example, it focuses on how to structure capital assets to maximize the gain on sale by minimizing the capital gains tax due. This sale may not occur for years, but questions must still be answered to maximize tax benefits:

• How can my property portfolio complement each other to minimize my capital gains tax bill when one or more of the properties is sold?
• What is my business worth? Do I have an exit strategy in place when I decide to sell the business and to whom I might sell it?
• How do I plan to pay the taxes due?
• What are the decisions that need to be made in the years before I exit my business that would maximize return and minimize taxes due?
• What is the difference between “loan proceeds” and “sales proceeds,” and why must I understand the difference?
• How do I take advantage of “timing” when accepting the proceeds of an asset sale?

 

6 Key Elements of an Effective Tax Management Plan

Following are the key elements to include in your tax plan that can help you work toward the largest possible tax savings.

• Assemble Your Team: It’s important to have an advisor knowledgeable in tax law and current tax-law changes who is also a proactive tax planner. If your CPA is also a strategic tax planner, he or she is a great fit. If not, a CERTIFIED FINANCIAL PLANNERTM is the perfect advisor to bring on board.
• Review Last Year’s Return Line by Line: Once your tax advisor wraps last year’s returns, it’s time to get to work with your tax-planning team. Your advisor should conduct a line-by-line review of your latest tax returns to identify every savings opportunity available. This is especially important this year. Even if your income and expenses remained the same from 2017 to 2018, with all the tax law changes, your returns could show significant changes in your tax bill.
• Business Owners: If you’re a business owner, your advisor needs to thoroughly review both your personal and your business returns from last year.
• Create a Holistic Tax Plan: With inefficiencies highlighted, it’s time to make a plan. An effective tax plan should encompass every area of your financial life. It will bridge your investments, income, business structures, retirement plan, charitable giving, estate plan, and more. Whether you’re working with a CPA or CFP®, they should pull in everything, no matter how simple or complex your situation.
• Create or Update Your Plan Between April and September: Aim to complete your plan before the end of September. This will help you maximize your savings by implementing any changes during the year rather than playing catchup in November/December.
• Coordinate Tax Planning with All of Your Advisors: Most of us take full advantage of the tax deductions we know about. The problem often lies in the gaps between our tax, financial, and legal work. Without a coordinated team of advisors, you could unknowingly make financial or legal decisions that create a negative tax burden. A good CFP® will be that main point of contact who acts as your head coach and coordinates the whole team.

Tips for success in tax season

No matter how long you have been or will be in the industry, tax season will never be described as “easy.” Packing the bulk of the year’s work into a few short months defies all possibility of normalcy in the workplace. The combination of long days, lack of sleep and piles of work takes a toll on even the most put-together accountant

Luckily, you can take measures now to make the rest of the 2019 tax season a more manageable, fulfilling experience. To give you some ideas, 10 of Canopy’s in-house tax professionals shared their tips for tax season success. So, whether you are interested in improving teamwork at your firm, taking better care of your health, or learning about specific tax regulations, keep reading for tips you can implement right away.

Set team expectations early and often: “As I’ve worked with various teams through busy seasons, one of the most valuable things we’ve done was set clear expectations. We meet early in the season to discuss as a group how each member of the team will be allowed enough flexibility to take personal time. For example, the team may decide that on certain days the whole team gets to work from home, or we may choose one night each week for a particular team member to leave the office early. Allowing each team member to retain some personal time is crucial for surviving busy season.

Work smarter, not harder: “It is important as an accountant to take care of your mental health during tax season. Work smarter and more efficiently so that you can be home at least twice a week for dinner with family, or make it a point to treat yourself to a movie. In order to work more efficiently, scrub your calendar. Remove all unnecessary meetings

Don’t forget the new pass-through deduction for business income: “Are any of your clients a sole proprietor, partner, member of an LLC or shareholder of an S corporation? If so, remember to apply pass-through income and they may be able to deduct up to 20 percent of their business income when filing their taxes. Based on the title of the deduction, many people are surprised that sole proprietors filing a Schedule C may be qualified for this tax break. As a tax professional, take extra time to understand the specific rules for this new deduction, so you know exactly how to help clients who are in these situations

 

steps for first-time tax filers

Filing your federal income tax return can seem overwhelming. But you can tackle tax season one step at a time—and avoid rookie mistakes—while you take advantage of money-saving opportunities.

You need to file a tax return if you meet or surpass certain levels of income during the year. If you’re employed, look at your pay stub for the “year to date” income—and if you have more than one job, be sure to add up your income from all your employers. Remember to include income from other sources, too, such as money you make on rental property, anything you sell, investments or interest

Stay on top of tax-related paperwork throughout the year; it will make your life easier during tax season. You might want to keep receipts for things like charitable donations, work-related expenses and medical bills, or other items from step 4. You may also want to keep statements from student loans or investments and any grants or fellowships. Having these handy and organized can help you determine whether to itemize and make the process easier. You should keep your paperwork after you file, too. The IRS recommends keeping records for at least three years.

You should receive forms about how much income you’ve earned from your employers and other income sources in January or February. If you are a full-time employee, you will receive a Form W-2 detailing your earnings, as well as which taxes were withheld. If you work freelance or on a contract, you may receive a Form 1099-MISC detailing what you earned. You may also receive documents showing dividends or interest earned on investments (Forms 1099-DIV or 1099-INT, for example), or student loan interest you’ve paid (Form 1098-E). If you’re a college student (or you have a dependent who is), you’ll receive a Form 1098-T that shows how much you paid in tuition, as well as any amounts you received from grants or fellowships, to help you figure out deductions and credits related to education expenses.

Getting a sense of which credits and deductions you may be eligible for can help you pull together the proper documentation. Here are a few to consider:

Saver’s credit. If you are not a full-time student and are not being claimed as a dependent, you may be eligible for a tax credit if you contribute to a retirement plan. The amount of the credit depends on your filing status and adjusted gross income. For the 2020 tax year,  If your filing status is single, you may be eligible if your adjusted gross income is $32,500 or less. If you are married and are filing jointly, you may be eligible if your adjusted gross income is $65,000 or less. However, these numbers are subject to change in future tax years.

Student loan interest. You can deduct up to $2,500 in interest payments, depending on your modified adjusted gross income.

Charitable deductions. Donating to your alma mater or a favorite charity? Generally, you can deduct those donations if you itemize your taxes.

Freelance expenses. If you are self-employed, you may be able to claim deductions for work-related expenses such as industry subscriptions and office supplies.

 

What Do You Need To File Taxes?

Every taxpayer’s situation is unique, and thus it is impossible to list all the items one must bring in for a tax appointment for every type of tax situation.  When in doubt, bring the item in question to your tax appointment

Prior Year Tax Return Copies

If you are a new client, please bring copies of your last 3 years federal and state income tax returns.  R&G Brenner will review them for FREE, and we may be able to amend mistakes/omissions getting you back additional refunds

Personal & Dependent Information

Social Security or ITIN Numbers with date of births for anyone who’ll be on your tax return

Childcare payment records with licensed provider’s ID number(s)

Amount of any alimony payments with ex-spouse SSN

Income Statements

Bring any & all W-2, 1098, 1099 & schedule K-1 forms

Purchase date & total investment for any stocks or property sold

List of investment related expenses

Education scholarships or fellowships

If you are planning on itemizing your deductions (Schedule A) please compose a spreadsheet/list summarizing them.  Itemized deductions include:

Mortgage interest, real estate & personal property tax records

Casualty & theft losses

Amounts of state & local income tax paid in prior years

Records of cash donations to religious institutions, schools & other charities

Records on non-cash charitable donations

Unreimbursed job related expenses (travel, tools, cell phone charges, uniform cost/cleaning, luggage, services fees, trade journals, meals & entertainment)

Job search/moving expenses

 

Should You Do Your Own Taxes?

Asking someone to do your taxes can be a little like asking for help with home improvement tasks. Some people enjoy do-it-yourself (DIY) projects—they have the knack, and would rather save money and keep their business to themselves. Meanwhile, others are happy to outsource these time-intensive chores to a professional, who may also do a better job.

It’s the same when it comes to preparing your own tax return. Whether you decide to pay someone depends on your confidence in crunching numbers and a basic understanding of tax rules, plus your willingness to put in the time.

Tax Laws in Effect for 2019

You might want to enlist the help of a professional to prepare your 2019 return, even if you consider yourself to be pretty tax-savvy, because the Tax Cuts and Jobs Act (TCJA) made some sweeping changes to the tax code when it went into effect on Jan. 1, 2018.

Standard deductions more or less doubled after the law went into effect, and this might make itemizing less attractive to some taxpayers who have chosen that route in the past, particularly because changes were made to quite a few itemized deductions as well.

The Cost Factor

One nice thing about preparing your tax return yourself is that it can be free. If you are an expert and choose to do it the old-fashioned way with a paper return and a pen, you will pay nothing. Many people also choose DIY tax preparation software through companies like TurboTax or H&R Block, which have very low fees and sometimes free deals. These services usually offer tax support and advice.

 

The best tax preparation software

Tax preparation software can speed up and simplify the process. But how do you know which product is best for you? NerdWallet, the personal finance website, did a lot of the legwork for you. Evaluations for the Best Tax Software of 2020 were based on features, tools, ease of use, support and price.

Read this before you buy tax prep software

If your adjusted gross income is below $69,000, visit the IRS website and see if you qualify for the Free File Program. Ten major software companies — including TurboTax, H&R Block and TaxAct — are taking part this year.

If you don’t qualify for IRS Free File, then you should look at the free packages available from the tax preparation companies. TurboTax, H&R Block, TaxAct, TaxSlayer and Jackson Hewitt all offer free online preparation and filing for those with simple tax returns.

BEST FOR SIMPLE RETURNS: H&R Block Free Edition

NerdWallet Take: “When it comes to tax prep software that can do simple returns at a reasonable price without sacrificing user-friendliness, we think H&R Block Free stands out from the crowd.”

NerdWallet defines a “simple” return as one that has W-2 wages, limited income from interest or dividends (less than $1,500) and taking the standard deduction.

Tips for Finding the Right Tax Accountant for You

Where to Look for a Tax Accountant

Some accountants are jacks-of-all-trades, while others specialize in certain areas. You don’t want to hire someone who has never handled an audit before if you’re being audited, but by the same token, you probably don’t need an audit expert to explore tax-advantaged savings for your new child’s education.

Beware of Red Flags

Be wary of an accountant who promises you a giant refund right from the start before even analyzing your personal financial situation. The same goes for someone who says that you can deduct an excessive number of expenses before really talking to you.

Those Retail Franchises

Retail tax franchises such as H&R Block, Jackson Hewitt, and Liberty Tax Service offer competent help if you just want to file a relatively straightforward tax return. Sometimes you can even find certified public accountants (CPAs) and enrolled agents (EAs) working in these offices.

Different Types of Tax Professionals: Enrolled Agents

EAs are the elite, at least as far as IRS credentials are concerned. They’ve passed rigorous testing and background checks administered by the IRS. The testing involves three parts.

Certified Public Accountants

CPAs have passed the rigorous Uniform CPA Examination and they’re licensed by the board of accountancy in the state where they work. They have accounting degrees from a university or college, and continued licensing requirements involve meeting certain character and experience thresholds.

 

How to Find a Good Accountant for Your Small Business

Referrals – ask other business people about their accountants.

Find out who other business people use and how satisfied they are with the services their accountant provides. If you don’t or can’t get any worthy referrals using this method, use the internet or yellow pages and choose several accounting firms.

Call the four or five accountants you’ve selected and ask to discuss their services.

Ask him or her about his education (such as whether he’s a CA or CGA) and about his experience with your industry. You can also check with their professional association to see if their stated qualifications are valid and there are no outstanding disciplinary issues.

Prepare a short list of questions you want to ask prospective accountants.

Don’t be shy about asking about billing. Ask about billing rates and how these are determined. Often you may have a quick question that can be answered via a short phone call or email – how do they bill phone or email advice?

Meet with the prospective accountant(s) you’ve chosen, and ask your questions.

There’s nothing like a face-to-face meeting for gauging how well you might work with another person. Besides assessing the accountant’s knowledge, see how comfortable you are with him or her and how well the two of you communicate with each other. When you choose an accountant for your business you’re going to be establishing a long term relationship, so feeling comfortable with them is important.

 

How to Find the Best C.P.A. or Tax Accountant Near You

Why you need to be careful when choosing a C.P.A.

Each year, the I.R.S. compiles a “Dirty Dozen” list of tax scams. Although the scams are wide-ranging, many of them include actions taken by shady tax preparers, such as promising inflated refunds, falsely claiming deductions and credits, or encouraging clients to avoid their tax obligations.

Compile a list of potential C.P.A.s and tax accountants

Like with most service providers, a great way to find a C.P.A. or accountant is to ask for a referral. But don’t just go with the first name you get — compile a list of three or four potential accountants.

Search the I.R.S. directory.

The one qualification every paid tax preparer must have is a preparer tax identification number, or P.T.I.N. Anyone can apply for a P.T.I.N. online for free, so a P.T.I.N. alone isn’t indicative of the person’s skill or experience.

Check with your state or national associations.

Many state boards of accountancy and state C.P.A. societies maintain online directories of members or can provide a list of tax pros in your area when asked. Not every C.P.A. prepares taxes, so you may need to do some research online or call to see if the people on your list provide the type of tax services you need.

Consider free tax-preparation resources.

If you make less than $56,000 per year or are age 60 and older, you may want to look into having your tax return prepared through the Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (T.C.E.) programs.

 

TIPS TO FINDING THE BEST ACCOUNTANT FOR MY BUSINESS

Additional Services

What issues are most important to you? Where do you see your business going? If you anticipate some major growth for your business you may want to have an accountant who is familiar with business and strategic planning, budgeting, cash flow management, and estate planning.

Has Worked With the IRS

Having to face an audit is stressful enough. Having to rely on an inexperienced accountant who has never faced the IRS only adds to the grueling experience.

They Are Active in the Local Community

This was touched upon earlier, but accountants should be members of the American Institute of Certified Public Accountants (AICPA), state societies of CPAs, and other professional groups to help them stay current on accounting and tax changes. They should also be active members of the local community so that you can see what they value.

Firm is Right Size For Your Business

A smaller accounting would work best with a small business. It just wouldn’t make sense for an accountant who works with enterprises to work for a company that only has three employees.

Available When Needed

If you have an emergency, will the accountant make the time to take your call and handle the crisis when needed?

 

How to Hire an Accountant

Business advisory services. Since an accountant should be knowledgeable about your business environment, your tax situation and your financial statements, it makes sense to ask them to pull all the pieces together and help you come up with a business plan and personal financial plan. Accountants can offer advice on everything from insurance (do you really need business interruption insurance or is it cheaper to lease a second site?) to expansion (how will additional capacity affect operating costs?). Accountants can bring a new level of insight, simply by virtue of their perspective.

Accounting and record-keeping. These are perhaps the most basic of accounting disciplines. While it makes sense for many business owners to manage their day-to-day records, an accountant can help set up bookkeeping and accounting systems and show you how to use them. A good system allows you to evaluate profitability and modify prices. It also lets you monitor expenses, track a budget, spot trends and reduce accounting fees required to produce financial statements and tax returns.

Tax advice. Accountants that provide assistance with tax-related issues usually can do so in two areas: tax compliance and tax planning. Planning refers to reducing your overall tax burden. Compliance refers to obeying the tax laws.

Auditing. These services are most commonly required by banks as a condition of a loan. There are many levels of auditing, ranging from simply preparing financial statements to an actual audit, where the accountant or other third party provides assurance that a company’s financial information is accurate.