THE ECONOMIC ­BLUEPRINT: January actions to keep the Grinch away on tax day

prev
next

Note from Kyle - For this week's column, I've asked CPAs Thomas Craig and Katie Geisinger to discuss tax options to reduce your taxes due in April.

By Thomas Craig
and Katie Geisinger

This was going to be the year the holidays would finally go smoothly. The turkey was purchased on time, no groceries were forgotten, and the vegan dish turned out great for cousin Reed's girlfriend. Things continued through the winter season until one day it didn't. Some Grinch broke in, stole the holiday spirit (robbed us), and even ate the cookies. We couldn't have the kids noticing something was amiss, so replacements were purchased, the antique clock was repaired, and the wife received all new jewelry. The holidays aren't cheap to begin with, and with the added expense, the money needed to come from somewhere. You hit up every business contact you knew and managed to close a massive end-of-the-year deal, securing the funds. Good thing you own a business. Unfortunately, your solution created a new problem with the tax man, and he is not as forgiving as the Grinch.

Even though 2019 has ended, you have some time to explore your options and reduce that tax due on April 15, 2020. The first option is an estimated payment, due by January 15, 2020. This may not completely eliminate your penalties and interest, though, because the IRS assumes you earn money evenly throughout the year. Fortunately, you can let them know that lucrative deal occurred in December by fully completing Form 2210, Schedule AI - Annualized Income Installment Method. By adding this form to the return, your tax advisor can decrease underpayment penalties and interest by disclosing how your income fluctuated through the year. This schedule can be completed even if you are unable to make any estimated payments.

Sometimes that year end deal was not planned, and perhaps neither you nor the business have cash on hand to make the estimated tax payments by the due date. That eliminates the opportunity to pay your individual taxes on a timely basis, but does not eliminate all options. That retirement plan you always meant to start is suddenly looking more favorable. Lucky for you, as the only W-2 employee, you can start a Simplified Employee Pension (SEP). The money is yours, whether the business continues doing well or not, and it helps secure your financial security during your retirement.

Retirement plans each have their own rules on timing and contributions, but a SEP plan is unique in its ease to start and flexible contribution schedule. You have until the due date, or extended due date, if the federal return is extended. A portion of the net income can be contributed to a SEP, up to 56,000 in 2019, adjusted yearly. With all of the limitations and rules surrounding retirement plans, make sure to talk to a valued business advisor regarding your contribution, to ensure you are in compliance with all regulations.

Avoiding the problem until April 15 will not solve your problem, and may make things worse. Just because you cannot see a solution, does not mean that your Tax Advisor cannot help you. It may be small options such as changing which tax to pay. States are struggling and looking for ways to increase revenue, which means more penalty for you. If you can only pay a little, it may go further to pay your state tax burden first. Even small changes can make a big difference if implemented in a timely basis. Remember to consult your Tax Advisor early to avoid disappointment when you hear of all the opportunities you missed. Be safe this year, and hopefully the Grinch avoids visiting any houses this winter.

--------

Attorney Kyle Zwiren works with Financial Architects Inc., an independently-owned company located in Farmington Hills. Zwiren and his team serve attorneys and other professionals to help them design financial plans in line with their goals and based on optimal efficiency. He practiced law prior to becoming a Financial Architect and left the practice to follow his passion. To talk to Zwiren about other topics featured in The Economic Blueprint, email him at kzwiren@financialarch.com or call him at 248-482-3622.

Published: Fri, Jan 24, 2020