Be the Master of Your Tax Domain During Filing Season
You’re gathering documents, filling out your accountant’s questionnaire, organizing last year’s business expenses, hoping you’re maximizing your deductions & credits, and praying you don’t owe more than you’ve already withheld or paid quarterly.
There is A LOT going on.
First, breathe.
Second, let’s take a step back and assess what is and is not within our control between January 1st and April 15th.
Filing Extensions
It’s important to separate disaster relief extensions from requests to file an extension.
Disaster relief extensions allow you to push it all back to October 15th. The reporting AND the payments. It’s the government’s way of saying we get it, you’ve got more important things to handle right now… come back to us in October.
Requesting an extension to file lets you delay filing the tax forms until October, but you still have to send in the money you owe by April 15.
Why would you request an extension? You might be waiting for certain forms like K-1s or corrected tax documents. You may have incurred large expenses near the end of 2024 and want more time to account for them properly (i.e. outright expense vs. depreciation).
Whatever the reason, the extension provides more time to get your taxes correct on the first go, rather than file corrections in the future – more work and fees for your CPA.
Estimated Tax Payments
If you are a full-time, W-2 employee and that’s your only source of income, you probably don’t need to make estimated payments. If you fill out form W4 per its instructions, withholding could be close to what you will owe.
When do you need to make extra payments?
When your tax liability is higher than $1,000 (in excess of your withholdings), you will need to either:
Consider bumping up your W-2 withholdings to account for the extra tax liability or
Begin making estimated payments.
Common cases when you may need to consider estimated payments:
IRA distributions that do not already have taxes withheld.
Income and capital gains from taxable accounts that may result in taxes in excess of $1,000.
Business owners, partners, or sole proprietors who have taxable income or distributions, which is not salary.
Since no two tax years are identical, the IRS makes it easy for taxpayers to avoid underpayment penalties as long as they follow one of two safe harbor rules:
Make quarterly payments totaling 100% of last year’s tax liability (or 110% if this year’s adjusted gross income is over $150,000) or
Make withholding and quarterly payments totaling 90% of your current year tax liability.
You can make equal or uneven quarterly payments as long as in each quarter they total one of the two stipulations above. If your income is uneven, you might have to compute your taxes four times during the year.
And, the IRS “quarters” are not divided evenly and are as follows:
April 15 – for income earned from January 1 – March 31
June 15 – for income earned from April 1 – May 31
September 15 – for income earned from June 1 – August 31
January 15 (of the following year) – for income earned from September 1 – December 31
So most people pay based on the prior year’s tax, unless that was exceptionally high compared to this year.
You may end up owing more or less when you actually file, but the safe harbor skirts the underpayment penalties. This is where partnering with an accountant or financial planner throughout the year can help to avoid the dreaded tax surprise come April 15th.
Retirement Plan & HSA Contributions
There is nuance to retirement planning post-December 31st and before April 15th.
Traditional IRA & Roth IRA
These must be opened and contributed to by April 15th, 2025 for tax year 2024. This is hard and fast. Extensions don’t apply.
SEP IRA
SEPs can be opened and contributed to by April 15th or October 15th if an extension is filed. Remember, SEP IRAs are employER contributions only.
Defined Benefit Plan
DB plans need to be opened by December 31st but contributions can be made up until April 15th or October 15th.
Solo 401(k)
Solo 401(k) plans must be opened by December 31st though there is a wrinkle with the contribution deadline.
EmployEE contributions: must be made by December 31st.
EmployER contributions: can be made by April 15th or October 15th.
If you are a solopreneur or only employ your spouse, solo 401(k) plans are pound for pound the best option out there.
Health Savings Accounts (HSAs)
I’d be remiss if I didn’t discuss the deadlines for the most tax-efficient investment vehicle available.
You must open an HSA by December 31st and can contribute up to April 15th.
Maximizing Deductions & Credits
In a perfect world, your books are organized with all expenses tracked and catalogued properly.
No?
Don’t sweat it but let 2024 be the last year you are not fully prepared to present your tax preparer with a clear system for tracking of expenses.
Clean bookkeeping, property catalogued expenses and separation of personal and business expenses can go a long way in making tax season less stressful for you.
I’ll be writing more about deductions and credits soon.
You’ve said goodbye to 2024 but don’t throw away those precious tax planning opportunities still available for 2024!
In the next couple of posts, I’ll highlight some tax strategies for small business owners that can save you thousands if not tens of thousands of dollars in annual tax savings.
Buckle up!
