Did You Survive Tax Day? 8 Signs You May Be Overpaying Your Taxes
Contrary to popular belief, the tax deadline of April 15th is different from Tax Freedom Day. Tax Freedom Day arrived on April 12 this year, the 102nd day of 2011. That means American worked 102 days, from January 1 to April 12, before they have earned enough money to pay this year's tax obligations at the federal, state and local levels. Tax Freedom day is the day that you can stop working for the government and start working for yourself.
This raises some questions: How do we know we are not being "overworked" by our government? Are we protecting ourselves from overpaying taxes? The good news is there are simple steps you can take to ensure you don’t overpay your fair share of taxes. To gauge your risk level, here are 8 signs that you may be overpaying your taxes and how you can protect yourself!
1. Recordkeeping
BAD SIGN: You do not have good bookkeeping systems in place. Ever heard of the saying, “What gets measured gets managed”? It is just as important to know how much money is going out of your business monthly as it is to know how much is coming in. If you are not keeping track of your monthly expenses, you can easily lose out on some legitimate tax deductions! Having accurate and timely financial information helps you to manage and grow your business, and it is also the foundation for an effective tax savings plan.
2. Communication
BAD SIGN: If you do not meet with your tax advisor throughout the year, plan on paying higher taxes. For those of us who plan on paying the least amount of taxes possible, proactive planning happens year-round. If April 15th is the first time you are thinking about reducing taxes for last year, you have probably missed out on some big tax saving opportunities. Open the lines of communication with your tax advisor to ensure you are maximizing your tax deductions throughout the year. Some of the most significant and impactful tax saving opportunities need to be implemented as part of your business’ operational system.
3. Knowledge
BAD SIGN: You have to explain your business operations to your tax preparer year after year. Not all tax advisors are created equal. Taxes are a very specialized area and there are specific strategies for specific business industries. For example, there are special tax saving opportunities for people in the real estate business. There are also special tax strategies for those in the manufacturing industry. The strategies that work for those in the services industry may not benefit those who are in the retail industry. Make sure your tax advisor is well versed in the tax saving opportunities in your industry.
4. Compensation
BAD SIGN: You don’t have a plan on how to take money out of your business in a tax-efficient manner. There are tons of different ways to take profits out of your business, and each of them has their pros and cons. For example, if you are a C Corporation, you may save thousands of dollars in taxes by paying yourself a higher salary every year. If you are an S Corporation, the opposite may be true where you can save thousands to tens of thousands of dollars by paying yourself the least amount of salary possible. There are also some great ways for you to extract profits out of your business completely tax-free.
5. Retirement Planning
BAD SIGN: You are not currently taking advantage of tax-deferred and/or tax-free opportunities for retirement planning through your business. Ask yourself: Are you currently using retirement planning to significantly reduce your taxes? There are so many different types of retirement accounts that are available for business owners to save taxes today and save for retirement at the same time. If you pay taxes to the IRS and have not used retirement planning techniques in the past, you are probably overpaying your taxes.
6. Fringe Benefits:
BAD SIGN: You have never heard of the term “fringe benefits.” There are tons of tax-free fringe benefits available where your company takes a tax deduction for perks they provide to you as the business owner. There are over a dozen of these wonderful techniques including company cars, gifts, and Medical Savings Accounts to name a few. If you do not utilize tax free fringe benefits as part of your business planning, you may be overpaying your taxes!
7. Personal and Business Deductions:
BAD SIGN: Not knowing what items you can legally shift from your personal bucket of deductions into legitimate business deductions. In this day and age, it has become harder and harder for us to distinguish between personal vs. business items. How many of us use our personal cellphone for business? How about our cars? iPads? Laptops? All these personal items that you use day in and day out for your business may be legitimate tax deductions. If you don't know how to shift personal items into business deductions, you may be overpaying your taxes!
8. Tax Savings Plan:
BAD SIGN: Not having a tax savings plan in place to ensure you and your business profits are protected from Uncle Sam. Incorporating all of the items we discussed above, the question you should be asking yourself is, "What is my tax savings plan?" If you don't know it, and if you can't verbalize it, then you probably don't have one. Not having an overall plan on "how" you will save taxes for your business and you personally is the most common mistake costing taxpayers to overpay taxes year after year.
If any of these issues apply to you, then you may be one of thousands of business owners in the United States who are overpaying your taxes. The only way to legally save taxes is with proactive tax planning, and the best time to start is today. As we all know, how much money we keep is more important than how much we actually make. So don't let Tax Day bring you down for 2011, and take action to get your Tax Savings Plan in place today.
