I see the light at the end of the tunnel. April 15th is almost here. Woohoo!! But that isn’t the point of this blog entry.
I want to touch on a subject from previous blogs, ones in which I mentioned that when January 1 rolls around I become a historian in preparing taxes and cannot go back and change what was done the previous year, and also tax planning. In both of these instances, it generally means the CPA wasn’t asked first. As a CPA, I am an advisor and not just a tax preparer. Even though you may have an issue where taxes don’t come to mind, any move you make financially could potentially have tax ramifications.
There are many instances in which I feel you should reach out to your CPA before you sign anything, or make any move. I can go back over my career and remember so many times when I received someone’s tax information and thought to myself “Why didn’t they at least contact me first”.
Here’s just a few scenarios I’ve run into over the years where a person’s tax situation could have been more advantageous if I was asked first:
Purchasing a property to flip: There’s a different tax treatment for property purchased to rent and property purchased to flip. In this instance, a taxpayer had several rental properties but in mid-year decided to flip properties. The taxpayer did not know that property flipping is taxed at ordinary rates and is considered self-employment income, as opposed to an entirely different set of tax rules for rental property. Thus, the tax was much higher than anticipated, and no estimated taxes were paid in during the year to cover.
Divorce: Before signing a divorce decree, your CPA should be contacted. In one case, I found out after the fact that a taxpayer gave away ½ of her capital loss carry forward to her ex-spouse. Since Massachusetts is not a community property state (one where it is assumed all property and tax attributes are held jointly), this particular tax attribute, the loss carry forward, was entirely hers.
Form W4: So many times I’ve prepared taxes where the taxpayer is surprised they owe money. For instance, someone with two kids may claim married with 2 dependents on their W4 form, and thus feel it’s correct. What they fail to consider is adding their income to their spouses. Also, in many cases there is other income earned, like interest, dividends, self-employment income, etc., which add to the total income. If all you have is wages, you may be OK, and even better off if you own a home and itemize deductions. But sometimes you need more withholdings during the year.
My words of caution are simple: Don’t make any financial moves without first reaching out to your CPA to see if there are any potential tax ramifications to the move you are about to make.