Some surprises are fun, but a surprise on a tax return isn't -- such as unexpectedly having to cut a big check, paying penalties for not paying in enough throughout the year or getting a huge refund - in other words, giving the government an interest-free loan.
A tax projection will help determine whether to adjust withholdings or estimated payments to avoid these and other negative surprises.
Also, if you are anticipating fluctuations in income or a life event such as retirement or a change in marital status, you may not be able to use the prior year as a gauge of how much tax you're going to pay. A tax projection can help in these scenarios.
Strike a balance between gains and losses
Large capital gains are great; you've probably gotten a solid return on your investment, and long-term gains are taxed at a beneficial 15 percent rate. But don't be satisfied with that result. Review your portfolio and sell assets with built-in losses to offset gains.
When generating those losses, keep in mind that any assets sold at a loss cannot be reacquired for at least 30 days. This netting strategy works both ways. If you've dumped some underperforming securities at a loss, look to generate gains to absorb the loss. Take the proceeds from the gains and reinvest them in something else or even right back into the same assets.
Have you looked at your portfolio mix lately? The 15 percent tax rate on qualified dividends makes income-producing stocks more attractive. Conservative taxpayers who didn't want to plunge all of their money into growth stocks now won't pay a tax "penalty" for choosing blue chips instead.
Also, consider shifting some funds from interest-producing investments (e.g., corporate bonds) to dividend-producing stocks to take advantage of the 15 percent rate.
Keeping it real
Real estate is still a great investment, but the cost involved magnifies the need for good tax planning. A cost segregation on recently purchased business or investment real estate will carve out portions of the property that can be depreciated over a shorter period.
Additionally, some costs of building renovations may be eligible for accelerated depreciation due to recent law changes. A property tax evaluation can potentially reduce real estate tax assessments.
And, if you plan to sell some real estate and the proceeds are not needed immediately, consider investing them in another piece of real estate. The gain from the sale can be deferred if the transaction is structured properly as a like-kind exchange.
Whether buying or selling a large asset or undergoing a lifestyle change, nearly every major event has tax and financial implications. There's no better time than the present to revisit your tax plan.
Phil Zaman and Andy Malone are certified public accountants. Zaman is a manager with CBIZ Accounting Tax & Advisory Services in Leawood, Kansas, and Malone is a director for CBIZ Accounting, Tax & Advisory, in Plymouth Meeting, Pa. CBIZ, a publicly traded company and the 10th largest accounting firm nationally (Accounting Today), provides a wide range of assurance, tax and consulting services to small and mid-sized companies. Reach Zaman at firstname.lastname@example.org and Malone at email@example.com or (610) 862-2202.