Last-minute tax tips/info

Taxes & my golf game: every year we say we are going to do things different. There is 1 week until this year's tax filing deadline. What can you do in one week? And what can you do in 53 weeks (next year's deadline?) Join for some tips, plus some key information about estimated taxes.

April 11, 2023

Transcript

 Shah Plan-it for April 11th, 2023. Oof. It's spring. That means golf clubs are coming out and I dunno if any of you guys watched the Masters over the weekend. I'm actually not a golf watcher. I do enjoy golf. But the masters did remind me of something. You know, I do this thing. Every year where I will eventually make it out to the golf course and I tell myself every year I'm gonna make it out more.

I'm gonna hit the driving range a little bit more. I'm gonna work on my, my approach game a little bit more. I'm gonna work on my putting a little bit more. And I'll be honest with you, it doesn't always happen. In fact, it hasn't happened yet. Mostly cuz of life and other priorities. But you know what's happening a week from today.

It is the tax. Filing deadline. So I want to talk to you this morning about tax filing because kind of like my golf game, you know, it's one of those things where I kind of think, okay, I'm gonna do things a little different next year. A lot of folks don't always do things a little bit different next year.

So you might have a little bit of things, a little bit of things. There might be a few things that you might want to consider this year. It's late, I'm not gonna lie. You have to file, you gotta notify. But some things that you probably should know maybe for the next week. And then things you should definitely know for the next year and a week.

So the next 53 weeks, you have until the next tax filing deadline. Let me put my big Bertha down here. My favorite, favorite club, by the way.  So a couple of things that I wanted to share with you, which I think might be worthwhile. So let me see if I can get technology working for me here and see if I can share my screen and share this with you.

But again, the goal is not to drive your tax preparers nuts right now, but. If there are some last minute things that you're inclined to do, again, individual circumstances will vary. Individual US or you know, your, your goals are going to dictate whether or not this is actually important. So this is not tax advice, legal advice, financial advice, cooking advice, marital advice.

But there are three things that come to mind that you might still be able to do today. And one is making traditional Roth IRA contributions. So if your income is too high, or if you are working and you have a 401K or a 4 0 3  or a similar type plan, you may not be able to make con, make any contributions to those individual type accounts, that are definitely, that are deductible.

That's a key. So a lot of it's a great question to talk through your financial advisor, your tax planner, as to see whether or not you'd be able to actually make these contributions and whether you can still make deductions. But generally if you are, you have until April 15th of this year to do so.

And I believe this year, it's actually April 18th. So you, you've got a little bit of time, even if you file like a, a pension. So even if you filed an extension, sorry you're, you're still not able to extend the time to make that I RRA contribution. So it is a timely thing. Now in hsa, a health savings account that's actually very similar, you have until the April 15th deadline to make that deduction if you choose to.

Make that contribution for last year. Now, you didn't have to participate in a high deductible, sorry, I take that back. You did have to deduct, you did have to participate in a high deductible HSA eligible plan. Pretty key distinction. So just to clarify, you did have to participate in a highly high deductible H s A eligible health plan at some point last year.

So that's a critical element. Otherwise, you can't make an H H S A deduction Now for our business owners who join us, and we know we have a, a bunch of those, especially since that, that CPA designation came in. I'm kidding. That was like a shameless plug. But if you are a business owner, you might still be able to reduce that tax liability by making a tax deductible contribution to an account, that is some sort of retirement account on behalf of the business.

And if it's, if it's on behalf of the business as opposed to you personally, the benefit is you can. Generally make those business contributions, so profit sharing contributions made by the business up until the tax fi business tax filing deadline, which can be extended, and that, unlike the I R A and the HSA contributions, you do get the extended deadline for business owners on a business level contribution.

So here are some last minute options here. Do not drive your tax preparers and your financial advisors and your attorneys nuts on this. Because the reality is it is really late, if you don't have a lot of the infrastructure sort of set up already. But remember, just like my golf game, you hit those, hit that driving range.

You, you know about this before. You might be able to do things now to set yourself up for success in the future and not just, the year this year now. I really wanna focus a little bit on this penalty versus deadline versus withholdings, right? So what you need to understand about the US tax system is that you generally need to pay taxes throughout the year.

The tax system is actually built on this pay as you go system and a pay as you go system. You're supposed to pay income, you're supposed to pay taxes as you earn income throughout the year. That's just how the system works. And if you don't, if you fall short on paying your taxes when they're due, there's an estimated tax penalty.

Now, the one thing to note here is the estimated penalty is different than the failure to file. Assuming that you, the assuming the failure to the pay penalty. The failure to pay penalty is what you'd be subject to. If we get to say April 18th of this year and you owe a tax and you don't pay your tax by the tax deadline, that's a failure to pay penalty, and that's separate.

It's a part from the estimated tax penalty. The estimated tax penalty is a penalty that you're supposed to make payments throughout the year, but you didn't do so. And ultimately, while we call it an estimated tax penalty, It's not really so much of a penalty as it's like an interest rate that's applied to the amount that you should have paid, but you didn't pay.

So because you have money in your pocket. You can take it and you can earn money with it. You could put it in a brokerage account, you could put it in a savings account or CD or bonds or whatever. And then you can go out and you can actually use those dollars. Now the i r s is saying that we could have made money off of it, so we're gonna basically charge you that penalty.

So that's a, that's sort of a simplification there. So there's a time value of money element there. And if you're not paying taxes in a timely fashion, you're short-changing the government. That's the way the government will look at it. Don't shoot the messenger here, please. All right. So that's just kind of the way that we do it.

So the way that they get compensated, the way that Congress compensates for that too, is they basically charge this interest rate. So they look at how much you should have paid versus how much you did actually pay. And obviously the difference is your underpayment. So that's the first bullet point here.

How we figure out how much is your underpayment. How, how much are we supposed to pay and versus how much did we pay? Right. That's, that's the underpayment, if you will. So, if we kind of remember what that is with the, with respect to the tax penalty, Keep that in mind for a little bit. How much should you have paid in the government?

How much were you short? That's how they assess this penalty. Now, as we move on here, looking at why this is a bigger deal this year, and this is why it's important for you to hear about it this morning on April 11th, because you still have time to make your estimated payments for the month of April. So why is this important?

Well, one of the reasons that the penalty being late on your is, is, is important today is because of interest rates. You can see at the start of last year, the estimated tax penalty was actually 3% in the first quarter of 2022. It's 7%, the first quarter of 2023. So more than doubled. And by the way, 7% has already been announced by the I R S to continue in the second quarter as well too.

So as you can see, it's higher than any time in recent history. In fact, you gotta go all the way back to over five years. Data. 7% is pretty high, and that's. Simply driven by interest rates. Today, the i r s looks at what those rates are and it sets its rates based on, you know, what, what the, on that basically.

So that is the estimated tax penalty. It's the amount of interest that you owe the I R S because you effectively have taken out a loan right. You take out a loan, if you owe a debt, a bill, or a tax bill and you haven't paid it, you effectively, it's like the IRS is losing out and it's like loaning you those dollars.

So if you owe it, you have to pay interest rate on it. And this just happens to be that interest rate that you've gotta pay. So there is a little bit of a difference, and there's two ways to make that liability payment. Usually it's gonna be either withholdings or estimated taxes. Now, this is a whole lot to hit you with one week before, so it's a good idea to know what your estimated tax liability is going to be and you, it's a good idea to actually know what those withholdings are.

So I won't go too deep down that rabbit hole, but it's, make sure it's something that you look at. I was actually just in a meeting with a client yesterday where, even though they're retired, there were not really withholdings being taken out sufficiently. So there's a tax liability every year. Now that being said, some people will say, Hey, it's not the worst thing to cut a checkout.

You know, there's this whole idea of I don't want to give the I IRS a interest free loan. Let the IRS give me the interest free loan. Fine. However, just know that sometimes it's a little painful to cut that check, so I'm hitting you up with some knowledge this morning. On, on the tax side, you got a week left, but you have 53 weeks wet left last year.

Those three things that I put there, I. There might be like 50 things that we could do for 2023 payments, so let's make sure that you're looking, thinking about your taxes throughout the year, not just thinking about your golf game. When you're about to tee off on that first shot and everybody's watching you and you're anxious and you're nervous, taxes are something that you should be looking at all year round.

Remember, It's not how much you make, it's how much you keep. So taxes have to be okay. I get it point taken. So all that being said, for my C p a friends, my accountant friends, and, and all the folks out there who are actually filing taxes, hang in there. You're almost there. You got another week. Until this, there is no shame in extensions and if you have any questions, if you have concerns, remember we're here for you. I'm Neel Shah. Thank you for joining us for this tax and spring driven Shah Plan-it. I will see you all soon.