THE TRUTH

Tax Savings Require Action!

Think of your taxes like a trip to your favorite coffee shop, only its a year long trip. Say you order a drink, and pay some money that you think will cover your bill… Just like every time you get paid, a little money gets sent to the IRS (that’s your tax withholding or estimated tax payments).

It’s kinda like you’re telling the store (or IRS) “hey, I think my total will be about this much, but we’ll settle up at the end of the year.”

Then, the cashier actually rings you up and tells you your total based on everything you ordered during the year. They’ll also total up everything you’ve paid and see if you’ve paid too much or too little. If you paid too little, you owe some more money (this is when you have to pay when you file)… but if you paid too much, you get your change (or a refund).

In this case, the cashier is like a tax preparer. The cashiers job is to accurately total up everything you ordered and all the money you’ve paid. Just like a tax preparer will total up all your income and expenses plus any tax payments you made during the year.

Here’s the key: the cashier can’t change what’s on the receipt.

The best the cashier, or tax preparer, can do is make sure everything is calculated correctly. If you didn’t have any coupons, or tax deductions and tax credits, there’s nothing left to ring up and nothing they can do to change your bill. Your total is your total!

They can’t create deductions out of thin air or go back in time and make contributions to certain accounts. Their role is simply to record what happened. They’re just tallying the total based on the choices you already made.

This is why now is when the real tax savings happen, not in April when you’re already filing!

How to Actually Lower Your Tax Bill

A lot of people think that tax savings are complicated, but it’s really just about being proactive. It’s about getting the “coupons” during the year, so when you see your tax preparer they can actually apply those savings to your tax return.

What you can do to actually lower your tax bill will vary based on your income, situation, and what’s available to you. I wrote a newsletter last month on the various tax saving options available to most individuals, you can find that here.

Most of these deductions or tax credits will be tied to the calendar year end, that is - most will have a 12/31 deadline! Yes, there are a few options that stretch out past the year end deadline to 4/15, like IRA or HSA contributions, but for the vast majority of tax savings the window closes when the new year starts!

What about for business owners?

Same! Your deductions and tax credits are generally tied to the 12/31 deadline, with a few exceptions to certain accounts. But just like the cashier can’t change what’s on the receipt for individuals, they can’t change it for business owners either.

How can you save on taxes?

You’ve got three options. Option one, make sure you’re capturing all the deductions already available to you by using an accounting or bookkeeping system to track everything. Not only will this ensure you’re getting deductions for what you’re entitled to, but it will create financial statements which you can take to your tax preparer. No more shoe boxes full of receipts or trying to figure out your activity for the year by looking at your bank statements (which by the way won’t hold up under audit).

Option two, prepay expenses. If your business has certain monthly expenses that you make every single month without fail, like rent for example, it’s possible that you can prepay some of those expenses and get a tax deduction. Keep in mind these must be ordinary and necessary expenses for your business and you can only use this strategy if you’re a cash basis tax payer - most small businesses are.

Option three, work with a tax advisor or strategist to help you find additional tax savings for your business. It may be starting a retirement plan like a 401k or adding a health insurance policy. It can be creating a new business entity or making an election to get taxed differently, like an S-Corp. It just depends on the type of business you have, how many owners there are, who those owners are, how many employees, who those employees are, how much money the business is making, etc.

Need help from a CPA? Im accepting new clients!

I can help with all three of the options above, if you’d like to work with me just respond to this email.