Imagine being at the bottom of a mountain bedecked in wintry splendor, hearing a rumble, and looking up to see a wall of dislodged snow racing down the mountain toward you like a white tsunami. That somewhat describes life in an accountant's office at tax time.
Please understand, no one's complaining. That's an accountant's job. It's just that response time from accountants for routine inquiries is generally affected at this time of year by the aforementioned avalanche.
Taxpayers naturally have questions of their accountants at tax time, some of which, if made earlier in the year, would significantly benefit them. Unfortunately, there also are issues that might go unshared, which creates potential problems.
Here are a few of the most common questions that might, or should have already, come up in this stretch run to the April 15 tax filing date:
- Do I need to make an IRA contribution in 2014?
There are 11 different types of Individual Retirement Accounts, traditional, Roth, and even specialized IRAs, for example, for education. There are different contribution limits depending on your adjusted gross income, marital status, whether you're filing separately or jointly, as head of a household or as a single person.
The easy answer is that yes, you need to make an IRA contribution and you should make it the maximum allowable. However, the easy answer isn't necessarily correct. Other factors are at play: income, liabilities, business considerations, age and more.
This is an important topic to discuss with your accountant before tax time.
- How do I estimate my income for the year?
On its face, another simple answer. But again, it's not. This isn't just a function of adjusted gross income. Other factors enter into this figure. A bonus, for instance. Did you go to Vegas and come back richer? If so, there are income and tax implications. Furthermore, there are often differences between income and taxable income.
Talk to your accountant.
- How do I reduce my tax liability?
The best way to arrive at the best answer is to talk to your accountant throughout the year about all aspects of your financial situation and plans. This brings up possibly the most important question you can ask of your accountant:
- How often should you and I talk?
Regularly. Think of your accountant as a financial health adviser. What your physician doesn't know can harm you ("Gee, doc, maybe I should have seen you earlier about this pain in my side.").
There are times when clients will become involved in a debt, equity or other complex transaction during the year and not explore the tax issues thoroughly with an accountant well-versed in the particular financial arena.
These decisions have implications affecting tax liability, business plans, revenue vs. expenses, etc.
This same advice applies to individual taxpayers. Your situation may change dramatically throughout the year, or it may be static. Either way, communication is crucial.
This article was originally posted in the Knoxville News Sentinel on March 29, 2015.