Year End Tax Planning


We’re Los Angeles CPAs helping some of the best companies (and individuals!) in greater Los Angeles.

The year 2020 isn’t coming to an end soon enough for many people as we head to the end of the year. With the end of year coming it is a good time to finalize tax planning to reduce your taxes. In this post we will discuss some opportunities and items to check prior to yearend.

Many individuals have had income changes that have occurred during the year but have not changed their tax withholdings. This is a mistake as those changes will affect how much is due. For those that have lost income and are making estimated payments, the 4th Quarter payment is coming up and this payment can be reduced or eliminated which will help cash flow. If the opposite occurred and there is more income, then a similar increase in payment should be made. In the case of salaried employees with a large change in income, if still employed, a change in withholdings could be warranted. If you have the opportunity to defer income such as bonuses it may make sense to do this in a year with high income as well.

Retirement accounts such as IRA, SEP, and Roth IRAs allow reductions in taxable income. In addition, these contributions can be done in the year after taxes are due, typically allowed up to the tax filing due date. This is one of the few items that can be changed after the tax year has been completed to adjust your tax liability.

If you itemize then there are opportunities to make additional mortgage interest payments, real estate tax (below 10,000 cap with state income tax), medical expenses, and contributions prior to yearend. With the higher standard deduction this may also be necessary in order to be able to take the deduction at all so strategizing and batching the expenses will be advantageous. If capital gains are going to be big for the year and there are capital losses that haven’t been recognized, it would make sense to have a conversation with your broker about whether to sell to reduce the tax on those gains prior to yearend.

Make sure that when yearend arrives and you aren’t surprised by a large tax bill that you could’ve planned for with a little bit of work in December. If you have any tax planning concerns, we can help and review your current situation.

We’re standing by to help you with all your accounting needs, feel free to contact us anytime!

Year End Tax Planning2020-12-03T07:28:44-08:00

Tax Preparation and Planning: Eliminate Surprises on Tax Day


Check back for our monthly posts on taxes, we’re Glendale tax accountants helping some of the best companies in Glendale.

One of the most dreaded words for the average person is to hear “taxes”. The connotation is money that needs to be paid no matter what and a sneaking concern that there will be an amount owed. You will find taxpayers who would rather get large refunds then deal with the possibility of owing taxes at the time of filing even though this is not a good money management strategy. This post will try to help bring a rationale approach to getting ready for tax filing time and planning so there won’t be surprises.

The first item that needs to be defined is what type of income are you going to need to report. There are three different categories that you will typically fall into: Employee, self-employed and passive income which is dividend, interest, and rental income as examples. Passive income from an income tax point of view is more limited then the list above but conceptually understanding this group as passive is the easiest way of think about it as you are not actively involved in the earning of that income as you would with a normal job.

If you are employed, you have a concrete understanding of how much you will make and can make choices of how much your withholdings will be. If you are going to have a substantial change in that amount, then you may need to take out more withholdings to reflect the higher income. The lower your withholding, the higher the amount that will be withheld. The W-4 which you fill out when you start is a general guideline of withholdings, don’t let it fool you into thinking that it will take into account all of your circumstances.

Things get more complicated when there are other income and deductions available. All taxpayers have the option to take a standard deduction or to itemize based on having certain expenses that are tax deductible. Itemizing usually hinges on owning a principal residence with a mortgage but can occur if you have large medical or charitable deductions. Itemizing should be pretty standard with most expenses that you can take as a deduction being known year in year out.

Challenges come into play when you have investment portfolios as interest, dividends, and capital gains can swing wildly. One tip is to have an understanding of when brokers are selling stocks and getting an understanding of gains. I see taxpayers not being aware of the tax implications of stock sales and how much of a hit they will take on capital gains. With proper planning you can rid yourself of stocks that are doing poorly in years where you have gains to net them and reduce your taxable gains.

Self-employed people usually have challenges with tax planning since the income usually swings more often than salaried. This is where tax planning comes in and takes a much larger place in the equation of understanding how much tax will be due. This circumstance is best dealt with by doing an accounting of earnings in December and figuring out what income will be to make certain that payments are made by year end. Self employed individual make their payments quarterly as estimated payments and the last payment is due January 15th of the subsequent year so this allows for time to figure out if there are additional amounts owed and be able to make payment timely.

Similarly, if you have investments in other businesses it becomes imperative to get estimates of how much you will be getting from those businesses. Unfortunately, this sometimes becomes difficult as some businesses are better run then others and can give you decent forecasts and some can not.  This results in many people with very complicated tax returns paying 100-110% of last year tax (depending on income) to cover current year and wait to receive all of their various third party activity later and deal with the potential liability at that time as paying that amount will at least eliminate penalties and interest.

In summary understand all your income and deductions and make sure you are taking out the proper withholdings or making estimated payments. If your income veers wildly year in year out, then a December accounting of what your situation is absolutely necessary so you can figure out true amount owed for that year. Be proactive and you will find that taxes may be unpleasant but not a word to be feared.

We’re standing by to help you with all your accounting needs, feel free to contact us anytime!

Tax Preparation and Planning: Eliminate Surprises on Tax Day2020-10-16T16:48:21-07:00
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