Tax Preparation vs. Tax Planning

Many people assume tax planning is the same as tax preparation but the two are actually quite different. Let’s take a closer look:

What is Tax Preparation?

Tax preparation is the process of preparing and filing a tax return. Generally, it is a one-time event that culminates in signing your return and finding out whether you owe the IRS money or will be receiving a refund.

For most people, tax preparation involves one or two trips to your accountant (CPA), generally around tax time (i.e., between January and April), to hand over any financial documents necessary to prepare your return and then to sign your return. They will also make sure any tax reporting on your return complies with federal and state tax law.

Alternately, Individual taxpayers might use an enrolled agent, attorney, or a tax preparer who doesn’t necessarily have a professional credential. For simple returns, some individuals prepare and file their own tax forms with the IRS. No matter who prepares your tax return, however, you expect them to be trustworthy (you will be entrusting them with your personal financial details), skilled in tax preparation and to accurately file your income tax return in a timely manner.

What is Tax Planning?

Tax planning is a year-round process (as opposed to a seasonal event) and is a separate service from tax preparation. Both individuals and business owners can take advantage of tax planning services, which are typically performed by a CPA and accounting firm with in-depth experience and knowledge of tax law, rather than a tax preparer.

Examples of tax planning include bunching expenses (e.g., medical) to maximize deductions, how to use tax-loss harvesting to offset investment gains, increasing retirement plan contributions to defer income, and best timing for capital expenditures to reap the tax benefits. Good recordkeeping is also an important part of tax planning and makes it easier to pay quarterly estimated taxes, for example, or prepare tax returns the following year.

Tax planning is something that most taxpayers do not take advantage of – but should – because it can help minimize their tax liability on next year’s tax return by planning ahead. While it may mean spending more time with an accountant, say quarterly or even monthly, the tax benefit is usually worth it. By reviewing past returns an accountant will have a more clear picture of what can be done this year to save money on next year’s tax return.

If you’re ready to learn more about what strategies you can use to reduce your tax bill next year, help is just a phone call away.

• By Leon Clinton
• October 5, 2019

Tax Due Dates for October 2019

October 10

Employees who work for tips – If you received $20 or more in tips during September, report them to your employer. You can use Form 4070.

October 15

Individuals – If you have an automatic 6-month extension to file your income tax return for 2018, file Form 1040 and pay any tax, interest, and penalties due.

Corporations – File a 2018 calendar year income tax return (Form 1120) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension.

Employers Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in September.

Employers Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in September.

October 31

Employers – Social Security, Medicare, and withheld income tax. File form 941 for the third quarter of 2019. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until November 12 to file the return.

Certain Small Employers – Deposit any undeposited tax if your tax liability is $2,500 or more for 2019 but less than $2,500 for the third quarter.

Employers – Federal Unemployment Tax. Deposit the tax owed through September if more than $500.

• By Leon Clinton
• October 2, 2019

The Home Office Tax Deduction for Small Business

If you’re a small business owner who uses your home for business you may be eligible to claim the home office deduction, which allows you to deduct certain home expenses on your tax return. The benefit to this, of course, is that it can reduce the amount of your taxable income.

Here are seven tips to help you understand the home office deduction and determining whether you can claim the home office deduction on your tax return:

1. The home office deduction is available to both homeowners and renters.

2. There are certain expenses taxpayers can deduct including mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent.

3. Taxpayers must meet specific requirements to claim home expenses as a deduction; however, the deductible amount of these types of expenses may be limited.

4. The term “home” for purposes of this deduction is defined as a house, apartment, condominium, mobile home, boat or similar property. It also includes structures on the property such as an unattached garage, studio, barn or greenhouse. It does not include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.

5. To qualify for the home office deduction your home must meet two basic requirements:

• There must be exclusive use of a portion of the home for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.
• The home must be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home, but also uses their home to conduct business may still qualify for a home office deduction.

6. Expenses that relate to a separate structure not attached to the home qualify for a home office deduction only if the structure is used exclusively and regularly for business.

7. Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:

Please contact the office if you have any questions about the home office deduction.

• By Leon Clinton
• September 27, 2019