We often see individual taxpayers and business owners caught by surprise with an unexpected large tax bill which they were never prepared for. This situation can result in significant stress and cash flow issues both on a personal and business level. There is often very little that can be done at the end of the year or even at tax time in order to mitigate a huge unexpected tax bill however, this situation can be easily avoided by taking a proactive approach with Tax Projections.
What are Tax Projections?
Tax projections are reports prepared by your Accountant which are used to estimate your personal and/or business tax liability. Our firm offers Tax Projections as part of our Tax Planning services and we review and update tax projections on a quarterly basis to ensure they are current and still accurate.
Why do Tax Projections need to be reviewed on a regular basis?
As your business performance changes throughout the year, so does the amount of Taxable Income that could impact your individual returns, therefore, it is important to review your updated financial information on a regular basis in order to keep your Tax Projections current and accurate. Similarly, at the personal level, there might be life events that could impact your overall tax liability. For example, the birth of a child, increased medical costs, changes and withdrawals from retirement accounts, the acquisition of rental property, can all massively impact your overall tax situation. Therefore, Tax Projections must be regularly tested and reviewed to ensure it is taking into account all changes that could impact your overall taxes.
What are the Benefits of Tax Projections?
Especially for Business Owners, managing your business cash flow is essential in order to keep things moving in the right direction, unexpected tax bills can cause havoc on your business cash flow. Therefore, understanding what your future tax liability will be and most of all, preparing yourself ahead of time, allows you to better allocate your cash flow and avoid unnecessary stress.
Additionally, tax projections can help you make important changes to your current business practices in order to decrease your overall tax liability before the end of the year.
Some final suggestions:
Tax Projections are based on forward-looking assumptions, circumstances, existing tax law, and information that could change unexpectedly. Therefore, it is important that you work with an Accountant that regularly reviews and updates your tax projections. Otherwise, your tax returns when prepared, may drastically differ from the initial assumptions that were used to create your Tax Projections.