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Each year during tax season, the casual business owner hires a top-notch tax preparer, shows up at their office with a stack of records, and then expects a nice surprise when they receive their tax return.
When they quickly realize that their tax liability is much higher than expected, they blame their tax preparer.
But here’s the thing. Hiring a good tax preparer isn’t the secret to paying less money in taxes. Do you know what is? Carefully tax planning throughout the year!
6 Steps to Cut Your Taxes in Half This Year
Don’t wait until tax season rolls around to dump all of your paperwork on your tax preparer’s desk and then frantically ask them to work their magic. You’re going to be disappointed!
Like any other expense, income tax requires careful planning and management. Take the following six steps throughout the year to cut your taxes in half:
1. Take your mid-year and year-end tax planning seriously
If you hope to significantly reduce your tax liability, waiting until tax season isn’t going to cut it. In fact, because most moves need to be made before the end of the year, there is actually very little you can do to reduce your taxes once the new year arrives.
Here’s the other problem. There are many tax preparers who don’t do any tax planning. They will help you get your taxes filed before April but they do little beyond that.
So, your first course of action should be to find and hire a tax preparer who is available to help with your taxes throughout the entire year. They don’t grow on trees!
2. Consult your tax advisor before any major transactions
Even a relatively tax-savvy business owner might not grasp all of the tax implications of a specific transaction.
Whether you’re planning to open another business, sell certain assets, or take money out of a retirement account, speak with your tax advisor first. They will be able to tell you all of the potential consequences of that action and how it will impact your tax liability.
3. Keep good accounting records
It’s critical that you keep good accounting records year-round, not only to help make your tax preparer’s job a little easier but also to protect your business in the event of an audit!
There are all types of programs and apps that make organizing your accounting records a breeze. Invest in some software and commit yourself to keep good records from January 1st to December 31st!
4. Get your records to your tax preparer as early as possible
When you hand all of your records to your tax preparer mere weeks before the tax filing deadline, you can’t expect your tax preparer to give you the kind of help that you might be able to expect months prior.
The reality is that you’re probably one of the multiple clients who are getting their records in at the eleventh hour. Your already-overwhelmed tax preparer isn’t going to have the time to properly reduce your tax bill.
By getting your records to your tax preparer as early as possible, however, you can ensure that they are given plenty of time to chip away at your file—giving you the best chance at a reduction!
5. Be vigilant about putting away money for taxes
When your business is struggling financially or experiencing a season of poor cash flow, it may be tempting to stop putting money aside for taxes and instead hang on to any money that is coming in.
If you don’t make your estimated tax payments on time, however, chances are that you’ll be facing a large tax bill and penalties come tax season.
Making estimated tax payments doesn’t have to be difficult. As a rule of thumb, divide last year’s total tax liability by last year’s total sales. This is the percentage you should be putting into your tax savings account each week!
6. Educate yourself on the income tax law
As a business owner, you should have at least some understanding of the tax system and your responsibilities.
By no means are you required to be an expert on this front, but having some basic knowledge will go a long way!