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Traditional tax season has come to a close, and the feelings are flowing!
Perhaps you received a small (or large) refund and you’re feeling optimistic with grand plans about reinvesting the money, paying down debt or even scheduling a “treat yourself” day. If you just flustered through the last few months gathering random documents or even worse, you owe a substantial amount of money back to the government — you’re not alone.
Let’s take a look at three red flags that might signal the need to hire professional help:
If you recently learned you owe more money to the government than expected, you can be in for a painful experience. You know the saying “fool me once, shame on you”…but, when you have been fooled twice (or more) it’s time to get strategic.
Did you know that having a tax strategy in place can actually reduce your overall tax liability? A great strategy may be to transfer additional funds into a traditional retirement account such as a 401(k) to help offset your taxable income. By adding money to this account, you would only be taxed on what you withdraw in the future. This would allow you to keep more of your money now, and think ahead. Understand, these planning measures are a solid investment in your future. Stashing away rainy day money to help offset unplanned expenses can also help alleviate future stress. The best way to do this — talk with your tax professional to set up the most realistic strategy for your financial situation. We could all use a little stress relief!
Entrepreneurs and professionals in industries like technology, are often paid in a combination of ways. While payment that doesn’t appear in a regular paycheck might feel like phantom income, rest assured it’s not; nor does the IRS consider it as such.
It’s a good time to investigate any trends in how your employer is compensating you. Consider tech titans who pay their employees stocks as part of their compensation. Professionals in lucrative spaces might be granted restricted stock units (RSUs), which have the potential to bump them into a new tax bracket when vested. These stocks are vested over a set amount of time. This type of compensation is considered supplemental income. While some federal taxes are usually withheld when your RSUs vest, if your effective tax rate has increased over time, you may be surprised by a tax bill in April.
Alternatively, let’s say you are a full or partial owner of a company. As overall company revenue increases, you may receive a quarterly K-1 distribution.
Whatever the case may be, make sure you are accounting for all forms of compensation to avoid underpayment penalty fees, and adjust your quarterly tax payments as necessary.
Side hustles are a way to bring fruition to your passion. While the extra boost in income may take on the persona of “mad money”, rest assured that the government is counting every penny.
Unfortunately, audits have increased following widespread fraud as a result of the pandemic’s Paycheck Protection Program. In addition, loans and increases in supplemental funds to American taxpayers such as the childcare tax credit have also added to the increase. These audits have been particularly focused on those who are self employed.
It’s important to keep your documents orderly and your records tidy in the event you are audited. More importantly, keep all of your receipts!
Good Help Shouldn’t Be Hard to Find
If the first few months of the year have tested your resolve and you’re dreaming of filing for an extension, it’s time to call in reinforcements. When searching for a tax professional, search for professionals with the designation: Enrolled Agent (EA) or Certified Public Accountant (CPA).
Understand that there is a different level of service and cost between a tax preparer and a tax planner. A tax preparer will have a short-term outlook on your taxes, reviewing your historical documents and offering a transactional service to only complete your tax filing for the given year. By contrast, a tax planner will not only prepare your taxes, but also offer counsel and complete mid-year reviews to help you forecast your income and make adjustments in advance.
Above all, remember the IRS is a pay-as-you-earn tax system. The tax laws are ever changing and it’s difficult to keep up. It’s best to leave the tax game to the professionals.
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About Rianka R. Dorsainvil
Rianka R. Dorsainvil, CFP®️ is the Co-Founder and Co-CEO of 2050 Wealth Partners a virtual, fee-only comprehensive financial planning firm dedicated to serving first-generation wealth-builders, entrepreneurs, and thriving professionals. Rianka also hosts 2050 TrailBlazers, a podcast aimed to address the lack of diversity in the financial planning profession by engaging industry experts and leaders in conversation.
As an award winning successful, millennial Certified Financial Planner professional, Rianka offers a unique perspective not only on the current state of the financial service industry, but on how to stay relevant in an ever-changing world.
Rianka serves as a member of CNBC’s Digital Financial Advisor Council and CFP Board’s Diversity Advisory Group, is a Forbes Personal Finance Contributor, and has been recognized for her accomplishments and leadership within the industry by leading publications and organizations such as Investment News’ inaugural 2017 Women to Watch Rising Star and Wealth Management’s Ten to Watch in 2018. She has been published in PBS NewsHour, Forbes, USA Today, Black Enterprise, CNBC, Women’s Health, and more.