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How long do clients have to prevent a recurrence of an unpleasant income tax filing? The short answer is "the rest of the year." Therefore, if a taxpayer discovers under-withholding in May, there are only seven months to correct it before year-end.
Suppose your client's CPA discovers that they underpaid federal income taxes by $50,000, not including penalties and interest, due to an unusual compensation structure. If compensation is expected to remain unchanged for the rest of the calendar year, then the same underpayment—and a subsequent penalty—could occur again next year.
To avoid a recurrence, ask your client if their employer could withhold more from each remaining paycheck this year. The extra withholding would happen over the time remaining in the calendar year instead of a full 12 months. If the tax discrepancy relates to investments rather than employment, consider asking your client the following questions:
- Do you need all the investment income you currently receive in cash?
For clients not reliant upon current levels of investment income, consider other types of investment solutions that may produce less taxable income while still adhering to your clients’ goals and objectives. - What are your thoughts on asset location changes to help improve your after-tax investment experience?
Asset location is crucial in helping clients reduce their taxable income, generate tax-advantaged growth and keep more of what they’ve worked so hard to save. - How do you feel about building up a reserve of tax losses to help reduce the gains on which you pay taxes in the future?
There are opportunities for year-round tax-loss harvesting in all kinds of markets. You can also offer to work with their tax professionals to identify how systematic tax-loss harvesting can help improve after-tax outcomes. - How do you think an itemized deduction from charitable giving could impact your tax bill?
An itemized deduction from charitable giving is a potential avenue to help clients reduce their adjusted gross income. There are different charitable giving strategies that can help clients maximize income tax benefits—while also maximizing their charitable impact.
Responses to these tax-forward questions can help you determine the next best steps to help clients improve next year’s tax experience.
Bottom line: The sooner you can uncover and help solve tax issues, the better the outcome—for your clients and your practice.
How long do clients have to prevent a recurrence of an unpleasant income tax filing? The short answer is ‘the rest of the year.'"
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