It’s Tax Deadline day for your 2022 return. While April 18th is a Big Deal in the tax world, it’s not for the reason you think. At least not for our clients.

First off, all our clients received extensions on their returns this year. Once the final numbers are in, we are seeing about 50% of clients have been filed. While the rest are either awaiting preparation or still missing some documents needed to complete a final return.

But we’re not here to talk about 2022 tax returns.

Today is the official start of 2023 Tax Planning Season!

There is no better time than today to start reviewing your 2023 tax liability and planning for ways to best optimize your tax situation.

Why Do Tax Planning?

Tax planning is important because it is not a “set it and forget it” activity for your clients. People change. Jobs change. New stock options grants are received. Tax laws…well you know.

Our client’s lives are in a constant state of flux. And every big family change can result in new planning ideas. Here are a few that we’ve already answered for clients this spring:

  1. What should I set my workplace withholding for RSUs so that I don’t owe big next year?
  2. Will I get a tax credit this year if I buy an electric vehicle?
  3. How many ISOs can I exercise this year and avoid AMT now that stock prices are lower?
  4. Do I need to make estimated payments this year due to my job change?
  5. What is my expected tax bill related to the rental property I sold?

Why is it Important to Plan Now?

Tax planning is always important, but why now in April? April 18th is also the deadline for first quarter estimated tax payments. See, the IRS expects you to pay your taxes evenly throughout the year. If you owe more than $1,000 in taxes at the end of the year, you’ll need to perform a computation to determine if you meet one of the two safe harbor rules to avoid underpayment penalties.

      IRS Safe Harbor Estimated Tax Rules

  • Pay 90% of your expected liability for 2023 taxes OR
  • Pay in 110% of your actual liability from 2022 taxes

If your income (and withholding at your workplace) is on an upward trend due to a big raise or promotion, you might easily meet the 110% of liability from your 2022 return. In this case, you might be able to avoid estimated payments. BUT, you still want to be on top of any potential balance due come April 2023.

If your income is about the same, or less than 2022, it’s important to plan now to make sure you are paying in at least 90% of your expected tax liability.

We expect to see more clients in need of estimated payment adjustments this year. With stock prices (and company valuations) often lower this year, RSUs, NQSOs, ESPPs, etc. may result in lower overall total compensation than in past years. 

As interest rates rise, so do IRS underpayment penalty rates. For Q1 & Q2, the IRS has set underpayment penalty rates at 7%. This is up from 3% (yes, really, 3%) from just a year ago. The last time rates were this high was 2008!

Planning isn’t All About Penalties

While we often focus a lot on how to keep our clients out of trouble with the IRS (and eliminate those pesky underpayment penalties), there are plenty of other ways to save your hard earned money.

Spring is the time to think about stock option exercises and sale strategies to take advantage of different tax rates. Maybe you expect a lower income year in 2023. This is the perfect time to strategize pushing more income into this year to achieve a lower overall lifetime tax burden.

Maybe 2023 is shaping up to be a banner year! How can we push off income to 2024 to lower your marginal tax bracket? Or what deductions can we consider this year?

If you haven’t signed up for our tax planning and projection service, now is a great time. After all, April 18 is the official start of Tax Planning Season!

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