As an entrepreneur, you have a lot on your plate. From managing day-to-day operations to planning for growth, it’s easy to push tax planning to the back burner. After all, tax season is months out! However, waiting until tax season to start thinking about your taxes can lead to unnecessary stress and potentially costly mistakes.
Instead of scrambling to gather receipts and documents in the weeks leading up to the tax filing deadline, make tax planning a year-round priority. By staying organized and proactive, you can avoid surprises, reduce your stress level, and take advantage of opportunities to lower your tax liability.
Keep Your Tax Records Organized
One of the most important things you can do is to keep your tax records organized throughout the year. This means creating a system for storing important documents, such as receipts, invoices, and bank statements. Don’t wait til December or January to start adding up all of your child care expenses, for example. Have a way to track and store all of your tax-related information as you go.
As you receive tax-related documents, add them to your files and your accountant’s secure portal immediately. This will make it easier to find what you need when it’s time to prepare your tax return and may even help you discover overlooked deductions or credits.
Understand Your Filing Status and Adjusted Gross Income
Your filing status determines your filing requirements, standard deduction, eligibility for certain credits, and the correct amount of tax you should pay. Changes in your personal life, such as getting married or divorced, can affect your filing status and tax situation.
Similarly, your adjusted gross income (AGI) is an important factor in determining your tax rate and how much you owe. Your AGI is your total income from all sources minus any adjustments. Generally, the higher your AGI, the more you’ll pay in taxes.
By understanding these concepts, you can make informed decisions throughout the year to lower your AGI and minimize your tax liability. For example, contributing to a retirement plan at work or a traditional IRA can reduce your taxable income.
Check Your Withholding and Make Necessary Adjustments
Since federal taxes operate on a pay-as-you-go basis, it’s important to ensure that you’re withholding enough from your pay to cover your taxes owed. If your personal or financial situation changes during the year, you may need to adjust your withholding.
For example, did you start a side hustle? Get a big promotion? If there are any anticipated changes to your personal income, this is a great time to make sure you are withholding the correct amount.
To check your withholding, use the IRS Withholding Estimator. If you need to make changes, provide your employer with an updated Form W-4. This will help you avoid underpaying or overpaying your taxes throughout the year.
Stay Up-to-Date with Address and Name Changes
If you move or change your name, be sure to notify the United States Postal Service, your employers, and the IRS. To officially change your mailing address with the IRS, complete Form 8822, Change of Address, and mail it to the correct address for your area. Report any name changes to the Social Security Administration.
Keeping your information current will help ensure that you receive important tax documents and correspondence in a timely manner, making the filing process smoother.
Let Your Accountant Know of Changes to Your Personal or Business Situation
While you may not have your accountant on speed dial, it’s very important to let him or her know where there is a change in your life that could have tax implications. A few examples include starting a new business, marriage, divorce, new baby, home sale, purchase or sale of an investment property, stock sales, or an inheritance.
Staying in regular contact with a proactive CPA advisor allows you to optimize your personal and business tax strategy. No one wants stress or surprises at tax time, and this is the best way to avoid both.
The Bottom Line
Prioritize these two things now: getting all of your expenses, revenue sources, and tax documents organized for the year, and schedule a check-in or tax planning meeting with your CPA.
Questions? Need to schedule a meeting? We’re happy to help! Call us anytime at (614) 456-7222.
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