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Thank you for the
excellent work.
I look forward to working with you in the future again and will
recommend you highly to my colleagues. – Mohammed,
MD
Tax Projection Services
At some point during the year, every taxpayer should make
sure that they will have enough taxes paid in during the year. Those who
don't pay in enough taxes during the year may be assessed costly, and
unnecessary, penalties.
The only way to avoid any surprises next April is to work
through a preliminary income tax projection. Our CPAs would be happy
to meet with you, review your income and expected expenses, and calculate a
tax projection for you. Armed with this information, we can advice you
on ways to reduce monies owed to the IRS in April.
Individuals who have been compensated as an independent
contractor, or have earned other types of income with no applicable taxes
withheld, may be required to submit quarterly estimated tax payments to the
federal and state governments.
We can help you ensure that you're paying the estimated
taxes correctly. We help calculate the estimated taxes you should pay
and print the quarterly tax vouchers for you as well.
To have a CPA calculate your income tax projection or
estimated tax payments, please contact us at 800.471.0045 or
use our
online request form to schedule an
appointment.
WERE
YOU SURPRISED ON APRIL 15TH?
by
Andrew D. Schwartz, CPA
Boy is the tax
code complicated. Does the complex set of rules cause you to be
surprised by the amount of money you end up paying or getting back on your
taxes each year?
The biggest
culprit is the reconciliation process known as the Form 1040. Each
winter, you tally up all of your various sources of income from the prior
year, then claim your allowable deductions against that income to determine
your taxable income. Based on that figure, you calculate your regular
tax liability and your alternative minimum tax liability, and pay whichever
one is higher.
Here's where many
CPA offices take on the feel of a high-stakes casino. If the amount of
taxes paid in during the year through withholdings and estimates exceed your
tax liability, you feel like a winner. When your total tax bill dwarfs
the payments you made during the year; sorry, dealer has twenty-one.
Here are some of
the common causes of an April 15th surprise:
Misleading
Withholding Tables:
Let's start by
admitting that the withholding tables do not work so well. It's not
uncommon for highly compensated taxpayers to have only W-2 income and either
owe the IRS five figures or get a substantial refund.
The W-4 form
appears to be easy enough to complete. Simply check whether you're
single or married, and jot down the number of "allowances" you want to
claim. Presumably, you claim an allowance for you, your spouse, each
of your kids, your mortgage, and any other sizeable deduction you can claim.
The problem is that with each additional allowance, less taxes are withheld,
even though your tax liability might not change by all that much due to the
Alternative Minimum Tax or a variety of other factors.
A second problem
is that each employer withholds taxes as if they are your only employer.
Work for multiple employers during the year, and there is a good chance that
you'll find yourself underwithheld. (However, if your total earnings
exceed $102k during 2008 and you work for more than one employer, you'll end
up with excess FICA taxes withheld which counts as additional federal taxes
paid in.)
If you're married,
watch out, since the withholding tables assume your spouse doesn't work.
For that reason, a married couple comprised of two working spouses may find
themselves to be underwithheld by 6% or more on their total wages. On
$300k of combined income, that translates into a shortfall of $18,000!
I surprised more than a few well compensated couples with the news that they
owe more than $10k in taxes, even though their only income was W-2 wages,
and they were confident that they completed their W-4 forms correctly.
The IRS is
well aware that the W-4 form can be quite misleading. For help
completing the W-4 form correctly, check out the
IRS' Online Withholding Calculator.
Not All Breaks
Are Equal:
Not all tax breaks
are created equal. Certain changes to your financial or personal
situation generally guarantee a big April 15th surprise. Get married
or buy a home during the year, and chances are good that you have no idea
how your taxes will end up that year.
Other tax breaks
that seem to indicate a substantial savings don't end up impacting your tax
situation much at all. Believe it or not, having a baby or sending a
child to college saves you very little in taxes unless your income is
relatively modest.
What if you take
full advantage of a retirement savings plan offered by your employer?
While money contributed into the plan through salary deferrals saves you
taxes, your employer reduces the taxes withheld from your pay by an
equivalent amount since the withholding tables are based on your taxable
earnings instead of your gross earnings. So even though maxing out
your salary deferrals is one of the best tax shelters available to you
during your working years, you will generally not see much of a change to
your refund or balance due by doing so.
Delayed Reaction:
Another
contributing factor to a big tax surprise is the fact that even though you
make the bulk of your tax planning decisions during the year, you don't see
the impact of those decisions until you prepare your returns the following
winter. When you finally work through your paperwork and realize there
is an issue to address, the next year is already one-quarter done, leaving
you just nine months to make any necessary adjustments. And then, if
you forget to make a second set of adjustments the following January, you'll
find yourself with another April 15th surprise when you prepare your taxes
for that year.
Besides setting
the rates for your withholdings and estimates, another common example is
paying for a child's dependent care expenses with pre-tax dollars through
your employer's flexible spending account. While this strategy
generally makes a lot of sense, it backfires if your spouse has no earned
income during the year.
Lets say you paid
for $5,000 of childcare expenses with pre-tax dollars through your
employer's FSA, but your spouse didn't earn any income during the year.
When you prepare your taxes, you'll need to add that $5k back to your
taxable wages, increasing your federal tax bill by up to 1,750, with no
accompanying withholding. And then, since you most likely sign up for
your benefits annually during November, once you realize this pitfall, it's
too late to undo the election for the current tax year.
Good Intentions
+ Complex Rules = April 15th Surprise:
Which of these
goals did you set last month?
With the April
15th deadline still a not-too-distant memory, invest some time now to make
those adjustments necessary to avoid a big tax surprise next April.
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