David M. Kaufmann, CPA
1466 Adobe Falls Way
Tax Surprises Can Be An Inconvenience –Tax Surprises Can Also Ruin Your Life
Here are some examples of situations that can cause these unwanted, possibly devastating, surprises:
Notice that many of these situations causing tax problems would otherwise be considered very good financial events.
Tax surprises can also be caused by changes in the tax law. For 2013, you may be looking at tax law changes as follows:
The Solution Is To Run One Or More Tax Projections
Like anything else when using good software the quality of your inputs is critical. GIGO - Garbage In Garbage Out. The key to making a good tax projection is to use your most recent tax return, and determine what items will change. This can be as much of an art as a science.
The most serious problem in creating reasonable tax projections is dealing with uncertainty. For example, what wage amount should you assume, when it is too early in the year to know what your wages will be? The best way to deal with uncertainty is to consider realistic alternatives. Using wages as an example, what is the lowest wage amount that you can realistically earn for the year; what is the most likely wage amount that you can realistically earn for the year; and what is the highest wage amount that you can realistically earn for the year?
There are several different strategies when making tax projections. One strategy is to look at multiple alternatives for a given year. Another strategy is to look at multiple years. A more complex strategy would be to look at multiple alternatives for more than one year.
It is imperative to use good quality software. Good tax projection software is not cheap. The gold standard in tax planning is the BNA Income Tax Planner starting at around $600.
What to do once the tax projection is done?
If you are in a situation where you can take more or less income at your discretion, or you can increase or decrease deductions (this might trigger the Alternative Minimum Tax (AMT)), you have something to work with since you can alter your tax situation.
If there is not much that you can change to alter your taxes, plan to adjust how you pay your taxes: