Taxes

tax planning vs tax preparation

Business Tax Planning vs. Business Tax Preparation: Maximizing Financial Efficiency

tax planning vs tax preparation

When it comes to managing the financial aspects of a business, taxes play a pivotal role in shaping profitability and long-term success. Business owners often find themselves navigating two key processes: tax planning and tax preparation. While these terms are closely related, they are fundamentally different paths to a company’s financial health. What exactly are the differences between tax planning and tax preparation? How do they contribute to maximizing financial efficiency?

Business Tax Planning: The Strategic Foundation

Business tax planning involves creating a compliant and comprehensive strategy that minimizes tax liabilities. Tax planning is proactive. A company can optimize tax outcomes using their financial activities, financial goals, and year-to-year changes in tax laws. Effective tax planning requires foresight, strategic thinking, and attention to detail.

At its core, business tax planning is about exploring legal avenues to reduce the amount of taxes a business owes. This can involve identifying deductions, credits, and exemptions that apply to the company’s operations. For instance, strategically timing purchases, investments, and expenses can help align the company’s financial decisions with favorable tax breaks.

Moreover, tax planning extends beyond a single fiscal year. Successful businesses analyze their long-term financial goals and create tax strategies that align with these objectives. This might involve choosing the most suitable business structure (such as LLC, S Corporation, or C Corporation) to optimize tax treatment and liability.

Business Tax Preparation: Precision and Compliance

Business tax preparation involves the meticulous gathering and organizing of financial documents and information required to complete tax returns accurately. In contrast to the year round activity of tax planning, tax preparation occurs only at tax time. 

Tax preparation centers on accuracy, adherence to regulations, and the correct calculation of tax liabilities. Businesses need to compile income and expense data, deductions, credits, and other pertinent financial information. This process is critical to ensure compliance with tax laws and avoid potential penalties or audits. 

The Symbiotic Relationship

Businesses have to perform tax preparation and ultimately can skip the planning process. But should they? If businesses desire to maximize its financial potential, then they won’t. Effective planning sets the stage for a smoother preparation process. When financial decisions are aligned with a well-crafted tax strategy, the tax preparation phase becomes more streamlined and less prone to errors.

In conclusion, a business can choose solely tax preparation, flying by the seat of their pants at the end of the year. Or a business can soar, achieving financial success with a precise strategy that lays the foundation for minimizing tax liabilities and optimizing financial outcomes. Confidently navigate the wild world of taxes with a professional tax planner and achieve better financial health.

 

tax planning doesn't just happen at tax time
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Tax Planning as a Service

Most people just think of taxes when returns are due. That’s probably because most accountants and other financial professionals don’t offer much else. Tax planning is a specialty. It’s also an incredibly important issue to consider for wealth building success.

There are lots of different applications for a tax planning professional. It ranges from careful and calculated steps for long term wealth building to panic button moments where today’s decision could have a big impact on taxes owed tomorrow. Sure, it’s great if you can know in advance what you’ll do in every circumstance, but life doesn’t always happen that way. Good tax planning consultants are not only there for retirement strategies, but are also available when you need input on now decisions that could be costly if not structured carefully.

Don’t think you don’t make enough money to make tax planning necessary? Lifestyle focused people can often benefit the most from engaging professional help to reduce tax liabilities. If you want your money to work for you so you can enjoy your life now and in the future, taxes matter.

What does a tax planner do?  

Tax planning has a big picture focus. It looks at all the financial pieces of your life to reduce taxes owed. Those who provide this service must be familiar with tax code, current tax regulations, your cash flow picture and goals, and your investment holdings. With this information, they’ll help you determine how to best make the amount of income you lawfully report as small as possible while also considering how to best invest your money to reduce taxes owed now and in the future.  

This is different from tax preparation in that your tax planner creates short term and long-term strategies to minimize what you’ll owe Uncle Sam and, where appropriate, the state you live in. It considers issues and solutions year-round. You can’t walk back decisions that result in high capital gains liabilities after the year is through.  

Effective tax planners need to know current tax laws, be aware of laws and regulations being considered, and familiar with how this may affect your current and future tax exposure. Without stepping out of the bounds of the law, they creative with solutions to help you find strategies for paying the lowest possible amount in taxes.

Why consider hiring a tax planning professional? 

Most people don’t get excited about paying taxes. Finding ways to owe less can be a bit of a thrill, though. Specialized tax planners look at both potential income tax and capital gains as well as wealth tax scenarios. This happens all year long, and considers everything from tax credits to tax loss harvesting. It’s particular applicable to business owners with pass through entities, but can also apply to individuals and families who have accumulated a little wealth or bought investment properties.

Estate planning isn’t a once and done event. Setting aside money for your heirs may be part of your goal, but there should be more thought put into how you do it. Sometimes what you think is a kindness will make a relative’s taxes a lot harder to manage. Tax planning can make sure you gift in a way that lowers both your recipients tax liability and yours.

A tax planning professional also understands how investment returns, varying annual expenses and inflation can impact your savings. Making adjustments for this as circumstances change can help protect or expand your wealth.   

Tax loss harvesting can be a big deal. Where this is particularly applicable is taxable investment accounts. Have a non-qualified brokerage account where you have people moving your money around to maximize growth? Each move can be taxed for the gain. If you’ve had a loss for the year, you can still owe money to Uncle Sam. That’s where the fourth quarter tax loss harvesting comes in. But if you wait that opportunity is gone. Tax planners make sure things like that don’t happen.  

Get clear on the small stuff

Little increases in capital gains, wages or other income can make a big difference in your tax bracket. There are ways to offset income. Maybe you have items for your side gig you haven’t thought to expense? Have an expert tax strategist look at all your finances can help uncover ways to manage your money for lower tax obligations. 

How charitable contributions can be handled has changed a lot in recent years. If your goal is to live a legacy for an organization or a cause, it’s important to understand how doing so can impact your tax picture – and theirs. A qualified tax planning professional can provide options you may not have considered.

Personally, I like a challenge. Call me before you hit the panic button or when you think there’s no way out of a sticky situation. Spend an hour with me and $250 before you make a decision that could cost you much, much more. Of course, if you’re not a current client and it could wait until after tax season, I’d be grateful.  

Photo by Jon Tyson on Unsplash

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Secure 2.0 Act Changes to Federal Tax Code

It’s a new year, which means new tax code changes. Some of those changes involve the Secure 2.0 Act. Many will appeal to tax payers. There are over 100 provisions in this Act, designed to encourage participation in retirement plans. We’ll focus on some of those most likely to be relevant to you.

401(k)s

Employers can provide incentives for employees to contribute to their retirement accounts as part of the Secure 2.0 Act provisions.

Student loan payments will qualify as employee contributions for employer matches to retirement accounts come 2024. Studies and personal stories argue student loan debt is a barrier to wealth building. By allowing employees to count repayments on higher education costs as substitutes for retirement contribution matches on 401(k)s, younger employees can see the benefits of compound interest earlier with retirement investments.  

One of the Act’s provisions involves auto enrollment in employer 401(k) or 403(b) retirement plans beginning in 2025. Employees can opt out, but if they don’t, plans will start at 3% of pretax earnings, increasing by one percent each year until reaching 10% of an employee’s annual salary. Employees can select to contribute more or less than formula figures. Businesses less than three years old, those with fewer than ten employees, and churches and government agencies are exempt.  

Minimum distribution requirements

The latest Secure 2.0 Act changes, effective January 2023, builds on the 2019 Secure Act. The 2019 legislation upped the required age for minimum distributions from 70 ½ to 72 with certain retirement accounts. Three different bills in the House and the Senate comprise the lates changes. Effective January 1, 2023 the age goes up to 73, then rises to 75 in 2033. Neither of these are retroactive.

529s changes with Secure 2.0 Act

Beginning January 1, 2025, some 529 accounts can be rolled over into a ROTH IRA. No penalty withdrawals are limited to 15-year-old+ accounts and capped at $35,000. Standard IRA contribution limits apply.  

Catch up contributions, emergencies and more

Beginning January 1, 2024, catch up contribution limits will go up for people 60-63 years old. Financial incentives are to be available for plan contributors and part-time worker access to retirement plans will be expanded.

Early emergency retirement account distributions are coming to your future. This includes up to $1000 allowed in withdrawals once during the year without being subject to the typical 10% tax penalty. If you don’t repay what you borrow within a specified time, you’ll have to wait three years to do it again. Abuse cases can be also eligible for penalty free withdrawals.     

Curiously, part of this legislation is a lost and found database of 401(k)s. The Department of Labor will house this. If you can’t keep track of where you’ve already invested in your retirement nest egg, maybe it is time to hire some help. Give us a call or shoot us an email and we’ll get you back on track.

Photo by Fabian Blank on Unsplash

Do you know what your costs are with Virginia's Mileage Choice Program?
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What’s the deal with Virginia’s Mileage Choice Program?

Have you heard about Virginia’s Mileage Choice Program? If not, and you drive a fuel-efficient vehicle, you will.

In July of this year (2022), the Commonwealth started offering drivers of low mileage vehicles an alternative to the standard fuel tax legislated in 2020. Those who drive electric cars or have automobiles with MPGs of 25 or greater may have noticed an extra charge as part of their registration fee over the past couple of years. It’s calculated on the assumption everyone drives 11,600 miles per year. Those who may be driving a lot fewer miles were being taxed the same as those with many more. The pitch is, it can save those equally but unfairly taxed some money; and it’s being promoted heavily as a kind-hearted initiative for efficiency vehicle sufferers.   

When anyone shows such enthusiasm over what sounds like a revenue loser, I feel the need to ask “Why?”

Like research?

Spend an hour or so on the website, following links, and reading PR material and you still won’t find anything useful about the details. In fact, the FAQs include answer to “What is it,” “Who operates it,” “How does it work” and “Why.” Seriously, that’s it. All of them under the FAQ website tab. So I did a button click on “enroll now” to try to get any information that’s of much use in assessing the program. Not a good sign. More useless FAQ answers. If the program were that great, FAQs would do more than regurgitate media release verbiage and give detailed instruction on how to find a VIN number (really?).

The website doesn’t include information to explain how the mileage reimbursement is calculated, or what your final savings is likely to be. There is an extensive list, however, of fees that will be levied if you step out of line. This includes Late Annual Odometer Image Upload Fee ($7.50) all the way up to your cost for replacing a device or failing to return one of $95.

The Virginia General Assembly was responding to less revenue coming in from fuel taxes levied at the pumps when they legislated the highway use fee. Estimated additional costs for this to fuel-efficient vehicle owners is $19-$109 annually. It made me wonder how much possible savings there could be for your average parking spot saving car.

How does the Virginia Mileage Choice Program work?  

With a minimum deposit of $15 and an agreement to get hooked up to a device that tracks your every movement (mileage traveled out of state is counted to determine what you owe), you’re in. Well, not quite. They have a list on the website of all you’ll need to get ready to register.

Are you ready to jump in right away? I admire your enthusiasm. But you might want to hang in here for another minute as I’ll talk about savings next. But, if you’re all in now, here’s what you should have ready when you go to the website at https://vamileagechoice.com/:

  • Name (if you need to look that up, maybe you shouldn’t be driving a car)
  • Registration address (ditto)
  • Vehicle Identification Number (Whew! Good thing there’s a FAQ on how to find a VIN number)
  • Driver’s License Number
  • License Plate Number
  • Title Number (Really?)
  • Credit or Debit Card

What kind of savings are possible?    

How much might you save by signing up? That’s not clear. So, I decided to figure how much this usage tax is costing people. My pickup is too much of a gas hog to qualify.

I have a colleague who drives a Kia Soul. I bet that qualified as fuel efficient and I was right. When I asked her about the highway use fee charge, she shared hers was $26 annually. Does it make sense for her to jump through the hoops to register for the program, install a device in her car that is owned and managed by a third party (right, the Commonwealth has delegated this entire program to the private sector), and risk the list of fees to be levied for non-compliance? She doesn’t think so. Neither do I.

What concerns me most about this program is the lack of transparency on a plan that would seem to reduce taxes collected two short years after the legislature felt it necessary to tack on this fee. What’s in it for the Commonwealth? I’ll hazard a guess. All that data being collected has a value. It begs the question, who’s paying who in this arrangement?

For what is likely to be savings that amount to less than the cost of an oil change (which will also be tracked), I’m not buying in. I’ll need some answers before I consider advising anyone to enroll in a program that doesn’t provide basic information about who’s doing the profiting, what the anticipated savings will be, and how all that information collected about you will be used – and by who. At least for now, as the name implies, Virginia’s Mileage Choice Program participation is a choice.  


Photo by Brendan Steeves on Unsplash

you can reduce taxes with year end planning

tax plan now for 2023 returns

A lot has changed with tax laws this year. This will affect how you can reduce your tax debt, where you can move things around to your benefit, and what you owe. You can’t change your capital gains tax liable after the year ends. Now is the time to plan for 2023 tax returns so you don’t get costly surprises when it’s time to file next year for what you did this year.

You could save more than you might imagine. Talk to your tax professional. He or she may be able to find ways to move money around to save you thousands and/or reduce your AGI taxable income. It’s incredibly important that you address this now. You don’t want to pay any more taxes than you have to.  

Changes to standard deductions

Numbers are going up in almost all categories for the standard deduction. In 2022 (that’s for the personal tax returns you’ll be filing in April 2023), the deduction goes up to $19,400 for head of household, $25,900 for joint filers, and $12,950 for those married but filing separately or single filers. That’s up from $18,800, $25,100, and $12,550 respectively.

Increases slated for 2023 are even higher. Individuals will see a $900 standard deduction increase to $13,850. Married filing jointly will go up to $27,700, an $1,800 increase over 2022. Head of household returns will see a $1,400 increase to $20,800.

There will be changes to the tax brackets too. These will change significantly in 2023. The new rackets for when you file in 2024 for your 2023 returns are as follows:

  • Individuals with income below $11,000 and married filing jointly with income of $22,000 will pay 10%
  • $11,000 – $44,724 pays 22% as individuals; Married with $22,000 to $89,449 will pay 12%. This is an increase of $725 and $1,450 respectively from 2022 thresholds.
  • 22% will be applied to individuals making up to $95,374 and married filing jointly couples making up to $190, 749. This is an increase of $2950 and $5,900 respectively.  
  • Those owing 24% can make up to $182,099 as individuals, or $364,199 for married couples; going up from 2022 by $6,300 and $12,600.
  • Additional tax brackets are 32%, 35% and 37%. Top earners will now owe the maximum amount on income over $578,125 for individuals and $693,750 for couples filing jointly. This is an increase of $38,225 and $45,900 from the prior years.

Capital Gains Adjustments  

The picture has also changed for capital gains tax liability come 2023. For the 2022 year, most net capital gains are no higher than 15%. If your taxable income is less than $40,000 for single filers or $80,800 married filing jointly or you’re a qualifying widow or widower, this may be taxed at 0%.

In 2023 that all changes. Individuals earning below $44,625 and joint filers at the $89,250 or below income range will still owe 0%. The 15% kicks in for up to $492,330 and $553,850 respectively. Earners bringing more than that will now owe 20%.

Small changes in your income can make a big difference in what you owe. Fortunately, there a lot of ways you can adjust what your claimed income is, so long as you take action prior to year end.

The point is, there’s nothing you can do to change your income after the tax year ends. That’s why it’s important to check in with someone who understands both tax law and investing during the months of November or December. Chances are, they’re pretty busy with other clients trying to do the same thing, so it makes sense to schedule this session as early as possible. The savings you realize as a result of this brief meeting could be substantial.  Do your tax planning now 2022, 2023 returns and beyond as little adjustments applied now can make a big difference in what you owe.  

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