Full disclosure: I'm not an accountant. I just get to hang out with them, which makes me dangerous to myself and others. This isn't tax advice. It's advice to seek tax advice.
We should all show our accountants some love. They bust their asses reading, interpreting and applying the tax laws. They file our taxes. They walk through the fire of dealing with the IRS and other tax authorities. And they help us at the end of the year with tax planning.
What Is Tax Planning + Why Do You Need It?
Tax planning is looking at your financial situation (business and personal) through the lens of taxes.
1. To Get Educated About Our Unknown Unknowns
Accountants spend productive time thinking about taxes, the tax code and how finances can be viewed through tax perspective. They have an education in tax that most people do not and are often required to continue their tax education in order to keep their certifications current.
Accountants know things that we don't even know we don't know. In other words, accountants help us understand what are our unknown unknowns. What are our tax blind spots? What are the concepts we are having trouble understanding that impact how we run our business? What are things we can do to manage our taxes more regularly so year-end or tax time doesn't have to be such an anxious time for us?
2. To Avoid Sticker Shock
If you've had a great year from an income perspective, there is chance you'll owe in taxes. A big reason to meet with your accountant before year-end is to understand what your tax bill will look like. Regardless of when you file your taxes, here in the U.S., you still need to pay your taxes by April or March 15 (depending on your entity set up).
3. To Weigh the Options
If you do owe more taxes than maybe you've anticipated or saved for, you might actually have some options that may help you reduce your over tax burden or make it more manageable over time. Your accountant will absolutely walk you through all the options and implications.
What Does Year-End Tax Planning Really Look Like?
First, you need to communicate to your accountant that you'd like to do some year-end tax planning. Some accountants may even reach out to you first.
Next, it's your responsibility to get all your financial data in order and delivered to your accountant. Typically you'll need the following:
- How much income you and/or your business has had for the year so far (this is in your bookkeeping records if you have been bookkeeping);
- How much income you expect to earn up until December 31 (this is your estimate/projection);
- Your tax-deductible expenses you have had for the year so far (this is in your bookkeeping records if you have been bookkeeping);
- A prediction of any other tax-deductible expenses you'll have through December 31;
- The most recent statements for the following: investment accounts, mortgage statements, student loan statements (you can also provide a current balance sheet from your bookkeeping records);
- If there is anything else specific to your tax situation, your accountant should ask you about it.
Why Does Tax Planning Need to Take Place Before the End of the Year?
Tax planning happens before the end of the year because usually the accounting period that most businesses use is a normal calendar year (January 1 through December 31). So, if there are any actions that you can take that could impact your taxes for the year, you typically have until December 31 to do so. Meeting and talking to your accountant before then should give you ample time to coordinate said actions.