5 New Year’s Resolutions for Taxpayers
The beginning of a new year brings much hope and opportunity. While most people probably don’t think about taxes when making New Year’s resolutions, it may be worth considering. Taxes are one of the largest expenses that we all have, and many of us aren’t even aware of how much we’re paying. Here are five New Year’s resolutions for taxpayers. Hopefully, you will consider employing at least one of them. 😊
Resolution #1- Start Your Tax Preparation as Early as Possible
Are you one of those clients that contacts your CPA on March 30th for your tax return that is due April 15th? If so, unless you have a very simple return, there is a good chance that you are going to end up filing an extension. Consider contacting your CPA in January for your March or April deadline. Yes—I said January! Even though the e-filing season isn’t typically open until late in the month of January, some of my clients have already engaged for taxes and have a premier spot in line to get their returns filed. The earlier you file, the more quality time your preparer can spend on your return and possibly recommend some actions you can take before the filing deadline to reduce your tax liability. Even if you don’t have all of the documents yet that you need to file (i.e. brokerage year-end reports and certain 1099’s) the tax return can be mostly prepared, and allow for those last additional documents to be incorporated when they become available.
Resolution #2- Pay No More Tax Than Your Legal Share
I find it quite interesting that taxpayers oftentimes say that they cannot afford or are unwilling to pay for tax planning services. While I definitely respect that viewpoint and do not resort to high-pressure sales tactics, the decision not to review how much you are paying in taxes usually means you are paying too much. And these overpayments generally are not small; they could amount to thousands and oftentimes tens of thousands of dollars in a single year. Though I cannot provide or guarantee a certain amount of tax savings, all the clients that I’ve assisted with comprehensive tax plans in 2021 were presented with strategies that saved at least double what they paid for the plan in tax savings. In many cases, it was significantly more than that. Think of what you can do with those tax savings—maybe they will enable you to take care of some of your other New Year’s resolutions like taking that much-needed vacation or purchasing some top-of-the-line exercise equipment.
Resolution #3- Pay as You Go Throughout the Year
Generally, if you have a balance due of more than $1,000 when your tax return is prepared, your CPA will likely put together some estimated tax payments for you. Estimated tax payments prevent you from owing the underpayment of the estimated tax penalty when you file your return and reduce the chances of a taxpayer having a large balance due. But for self-employed taxpayers, paying as you go may not be so easy. Income could be cyclical, seasonal, or business could be slow during certain times of the year. If you are finding it difficult to pay as you go, believe it or not, this may mean that your estimated tax payments might be too high. Taxpayers have the option of basing their estimated tax payments on the current year’s income rather than the previous year’s income. It might be worth reaching out to your CPA to recalculate estimated taxes if you feel like operations do not support what he or she put together at tax time.
Resolution #4- Pay All Tax Due by April 15
This one may seem like a no-brainer, but it is important to pay all tax due by April 15 to avoid late payment penalties and interest being assessed by the IRS. Believe it or not, I have seen a taxpayer who paid on April 20th get a bill for $10 in interest and penalties—and the IRS wants its money! In addition to avoiding penalties and interest, when a taxpayer has a record of paying timely each year if ever a situation arises in which the taxpayer is unable to pay on time, the IRS is more likely to work with the taxpayer given the previously stellar record of compliance. Unforeseen circumstances can arise for any taxpayer, so when it is within our control to be compliant, we should do all we can to accomplish that goal.
Resolution #5- Get Your Tax Debt from Prior Years Resolved
If you owe taxes for more than just the current year, it definitely should not be ignored. At the very least, you need a plan for how you are going to tackle the debt. It will not just go away, rather it only grows larger the longer it is outstanding due to the assessment of penalties and interest. If you do not feel that you can confidently put a plan together to tackle your tax debt, it may be time to contact a tax practitioner for assistance. In some cases, your debt could potentially be settled for significantly less than you owe. In other circumstances, the IRS may temporarily suspend collections activity due to a hardship you are encountering. Resolve to be proactive with your tax debt if you are in this situation, as it may assist with another New Year’s resolution—reducing stress!
I hope you have enjoyed reading these New Year’s resolutions for taxpayers. If you need help with accomplishing any of these or are at a loss for how to get started, feel free to contact me using the form below. I wish all of you a safe, happy, and prosperous 2022!