6 things CPAs wish you would do for tax season

As a CPA and tax preparer, I’m often tasked with explaining to clients why their tax refund is different than the amount they expected. Perhaps they earned more, which hopefully meant more money in their pocket during the year, but then they phased out of certain tax deductions or credits. Or sometimes, I’m breaking the hard news that my client owes a significant amount in taxes.

Since I’m not the only one in this situation, I asked my fellow CPAs what they wish their clients would do differently before filing their taxes. And since we can’t rewrite history, they also shared tips to help set yourself up for a better 2019.

Work with a tax professional now

If your tax situation is fairly simple — an employee with W-2 income and taking the standard deduction — you may be fine self-preparing your tax return using tax software. However, interpreting tax law changes, reporting self-employment income, and moving states during the year may warrant a call to a tax professional.

That’s another reason why Melanie Bledsoe, CPA and founder of Bledsoe Consulting Services wishes clients, especially business owners, would consider taking advantage of the expertise of a CPA versus trying to do things themselves. “Trying to take on your accounting and taxes by yourself, when you know nothing about it, has the potential to create so many headaches for the business owner,” said Bledsoe. “It’s better to hire the expert to get things like bookkeeping set up properly and then proceed — even if it is on your own. At least you are off to a good start and you have a CPA on your side confirming that what you are doing is correct.”

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Save for your retirement and save on taxes

Once the calendar year changes, your options for saving on taxes are generally limited to contributing to a tax-advantaged retirement account like a traditional IRA or SEP-IRA (for the self-employed). Deb Meyer is a CPA and financial planner and owner of WorthyNest®, a fee-only wealth management firm that helps parents build wealth without contradicting their values. As Meyer explained, “a 2018 versus 2019 tax deduction depends on your specific retirement plan type. For example, 401(k) contributions made now only count in the 2019 tax year, but traditional IRA contributions made by the tax filing deadline of April 15 could count for the 2018 tax year.” If you have income from self-employment, you have until your tax filing deadline plus valid extensions to contribute to a SEP-IRA.

As for 2019, Meyer suggests setting yourself up for success by saving. “Review (or prepare) a budget and set a target for a percentage of your income to go into savings. Use tax-advantaged accounts like the 401(k) plan or 403(b) plan if you’re a corporate or government employee.”   If you’re able, aim to contribute enough to maximize any employer match.

Meyer continues, “Contributing to a pre-tax rather than Roth 401(k) plan means you take the tax break now, and earnings grow tax-free until withdrawn. A Roth 401(k) plan may be more suitable if you know you’re in a lower income tax bracket now than in the future and have several years ahead of you to save. Although there is no current tax deduction for Roth contributions, your Roth savings account grows tax-free and you don’t pay income tax on qualified withdrawals.”

“If you’re self-employed or a small business owner, explore whether a company-sponsored retirement plan is possible and consult your tax professional. SEP-IRAs and SIMPLE IRAs are common for small businesses. If you don’t have a company retirement plan established, consider contributing to a traditional IRA instead. Your income will dictate whether you get a tax deduction or not.”

Max out contributions to a health savings account

If you are enrolled in a high deductible health plan insurance policy, you can contribute to a health savings account (HSA). Helena Swyter, CPA and founder of SweeterCPA, includes maxing out contributions to an HSA in her “golden three” of tax tips (the other two being retirement and college funding plans). “The benefits are three-fold,” explains Swyter. “Contributions are deductible on your current year tax return, savings grow tax-free, and you can withdraw money for qualified health expenses without paying taxes on the distribution. You can contribute to an HSA up until you file your taxes for the year, so this allows people to see directly how a contribution would impact the bottom line.”

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Save for education expenses

Parents may want to start saving for education expenses only when their emergency fund is fully padded and retirement savings are on track. Once you’re ready, Amy Northard, CPA from The Accountants for Creatives® suggests exploring the college funding options available to you, such as a 529 college savings plan, among others. She notes that working with a tax professional could help you make the most of the “tax advantages college funding vehicles offer, to encourage saving for college.”

Be intentional with business purchases

Business owners sometimes fall in the trap of making business purchases for the sole purpose of deducting those expenses to “save” on their tax bill. If you’re a business owner considering whether to make purchases before the end of the year, you may want to ask yourself whether those purchases are really necessary. Purchasing a new business computer for $2,000 will only save $500 on taxes (assuming a 25 percent tax rate). So would you rather keep the net $1,500 in your pocket?

Review your tax withholdings or estimated tax payments

There’s only so much a CPA can suggest to lower a client’s 2018 tax bill before filing in 2019, so sometimes the best course of action is to pay Uncle Sam and make improvements before next tax season. If you are a W-2 employee, check your W-4 and current tax withholdings. If you claim too many allowances, you may not have enough income taxes withheld during the year. If you tend to owe additional taxes and would prefer to get a refund, consider having more taxes withheld from your paycheck throughout the year. It’s also a good idea to check your withholdings if you’ve had a change in filing status, such as single to married filing jointly, or increased your family size.

If you’re self-employed, have significant investment income, or manage rental properties, you may also need to review your estimated tax payments. Just as you are earning income throughout the year, the IRS wants their cut throughout the year.

In most cases, you must pay estimated tax for 2019 if both of the following apply:

  1. You expect to owe at least $1,000 in tax for 2019, after subtracting your withholdings (if any) and refundable credits. Refundable credits are things like the Earned Income Credit and Child Tax Credit.
  2. You expect your withholding and refundable credits to be less than the smaller of:
    • 90 percent of the tax to be shown on your 2019 tax return, or
    • 100 percent of the tax shown on your 2018 tax return (110 percent for higher-income taxpayers). Your 2018 tax return must cover all 12 months.

Since everyone’s tax situation is a little different, be sure to consult with a tax professional about any changes to your financial situation throughout the year. While there’s still time to sneak in a few tax deductions for 2018, you’ll feel better about your 2019 tax bill if you perform a little preventative maintenance now.

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Cathy Derus is the founder of Brightwater Accounting. As a CPA and financial planner, she helps individuals and business owners eliminate stress and worry over taxes, business finances, and more. Anyone can throw numbers into tax software. She’s here to help her clients make sense of those numbers and create a better financial strategy for their businesses and lives. Her expertise has been featured in Entrepreneur, CNBC, US News & World Report, The Washington Post, Real Simple and Cosmopolitan.

Haven Life Insurance Agency (Haven Life) does not provide tax, legal or investment advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or investment advice. You should consult your own tax, legal, and investment advisors before engaging in any transaction. Haven Life does not endorse the services and/or strategies discussed here.

Haven Term is a Term Life Insurance Policy (DTC 042017 [OK1] and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. Policy and rider form numbers and features may vary by state and may not be available in all states. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Our Agency license number in California is OK71922 and in Arkansas, 100139527.

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