How a simple tax projection can help you make wise financial moves
Taxes are a necessary evil. We all have to pay them, but we certainly don’t want to overpay or get a shock that you owe a large amount. If you only meet with your accountant or CPA once per year in the spring, you may be missing out on an important opportunity to avoid those surprises at tax time.
What is a tax projection?
Tax projections are an estimate of the taxes you will pay for that year based on last year’s income and this year’s events.
How are they calculated?
The approach is simple: We take everything we know from your tax history and adjust the tax amounts according to the current year tax law. We incorporate whatever known variables you have for the current year such as current paystub and see where we net out. This simple analysis can streamline your financial objects for the year with clear parameters. Are you withholding too much so we can reduce your withholding to increase your take home pay? Will you owe taxes and do you need to start reducing your spending to set money aside for April? These are a few things that are important to know for your financial planning.
Top 3 reasons tax projections are important:
1) Tax laws are ever-changing. As soon as you think you have it all figured out, the political landscape shifts and new rules appear. The Tax Cuts and Jobs Act (2017), SECURE Act (2019) and CARES Act (2020) are recent examples of legislation that impacted individual returns.
2) Individuals with complicated taxes like business owners, employees paid on commission, or even people approaching retirement could be subject to large swings in income. Tax projections are a smart way to plan for these special instances.
3) Taxes have a funny way of hiding out in places you don’t expect. While high performing investments are typically a great thing, sharp increases in your non-salaried earnings can actually hurt your bottom line. In 2021, we saw significant capital gains that caused many taxpayers to owe unexpectedly.
At the most fundamental level, tax projections are like a scorecard and that score helps you identify any potential “surprises” before they unfold. Running these projections periodically is a great way to prepare for tax season and make more informed decisions about your money along the way. Projections can sound the alarm when you are potentially subject to penalties and interest and plan for things like swings in income and changes in the tax law.
Making decisions about your money isn’t always straightforward. At Storen Financial, our team is dedicated to helping you maximize your earnings and minimize your taxable consequences. If you would like to have a projection completed, please contact us (click here for contact information). This process might help you ward off potential problems down the road.
Blog by Kim Storen, EA – Business Tax Manager
Learn more about Kim and the rest of the Storen Financial team here.