Monday, October 15. That’s the tax extension deadline. If you requested one and haven’t filed yet, let me just say, set aside some time ASAP to get that knocked out.
If we filed an extension for you, and you haven’t gotten us your paperwork to finalize things on your behalf, same note as above.
You might be tempted to take care of it yourself… because your situation feels pretty straightforward or you just want to save on the money you’d spend having someone else more knowledgeable do it for you.
Saving money sounds good… until you end up spending even more to fix the problems that you created. I’ve had plenty of Colorado Springs people walk through my doors who needed help to fix something the software didn’t catch or something they just didn’t understand when they filled out the forms.
And there are some specific situations I want to talk about today that you’ll definitely want professional tax help navigating.
Because there are those of us who do this stuff in our sleep. (Okay, I promise I’m awake when I’m working, but you know what I mean.) This is what I love, and I can help you.
Specifically, there are some special life decisions that will demand tax advisory services (whether with me or another tax professional you trust).
Tax Advisory Services: When You Need a Trustworthy Colorado Springs Pro
“It is always wise to look ahead, but difficult to look further than you can see.” – Winston Churchill
Big life changes are inevitable. Some good, some bad. But there are some that will require you to be tax-smart in how you handle them.
Let’s do a little rundown of key moments when you should invest in tax advisory services before you pull the trigger on a big financial move:
1. Setting up your Colorado Springs business (including a side hustle):
This one may seem fairly obvious, but a surprising amount of people don’t actually think about the tax implications of starting a business, side hustlers especially. An especially important area in which you could benefit from tax advisory services is setting up your business entity.
Choosing the right business entity—whether it’s a sole proprietorship, partnership, LLC, or S-Corp—can have long-term tax consequences. For example, forming an S-Corp might offer tax savings through pass-through taxation, but it also requires you to pay yourself a “reasonable compensation,” which can complicate things if not handled correctly.
2. Withdrawing money from an IRA or 401k
When you withdraw money from a traditional IRA or traditional 401(k), that amount is generally considered taxable income for the year in which you make the withdrawal. It could push you into a higher tax bracket, increasing your overall tax liability. For example, if you’re in the 22 percent tax bracket and withdraw 50k, you could owe an additional 11k in federal taxes alone, not to mention state taxes where applicable.
There are also early withdrawal penalties that can come into play if you withdraw funds before reaching the age of 59½. You could face a 10 percent early withdrawal penalty on top of the regular income tax.
There are exceptions to this penalty but the rules are specific and must be followed closely. Exceptions include first-time home purchases, higher education expenses, medical expenses, and disability.
However, even if the penalty is waived, you’ll still owe income tax on the withdrawal, and the specific details of these exceptions can be tricky.
Note: The same rules don’t apply for Roth IRAs and Roth 401(k)s, which can be withdrawn tax-free and penalty-free at any time once you’ve reached 59.5 years of age (and the account’s been open for a minimum 5 years) since they’ve already been taxed. But don’t forget about earnings on contributions, which are taxable and can be penalized for early withdrawal.
3. Purchasing or selling your home
There are a lot of tax rules that can really impact your bottom line when buying or selling a home. For sellers, you’ll need to take into account capital gains taxes and have a good idea of how much of the profit from your home sale will be taxable.
Alternatively, if you’re buying, you can save money with deductions related to mortgage interest and property taxes. But, as with many deductions, the rules can be nuanced here.
4. Selling or buying a rental property
One major issue to watch out for when selling your rental property is depreciation recapture.
If you’ve been deducting depreciation to lower your taxes during the time you’ve owned the rental property, be mindful of that when you sell. The IRS will want some of that back in the form of taxes on those deductions. If your property has increased in value, you’ll also owe capital gains tax on the profit.
However, you might be able to defer those taxes by doing a 1031 exchange—reinvesting the proceeds into a similar property and pushing off taxes until you sell the new one. The rules for this are strict, though, so it’s crucial to get it right.
On the flip side, if you’re buying a rental property, you can deduct expenses like mortgage interest, property management fees, and even maintenance costs. But understanding what you can and can’t deduct, and how it affects your overall tax situation, can get complicated.
Other situations when tax advisory services will be helpful:
- If you’re considering gifting a large sum of money to family or friends, you might run into gift tax rules. The IRS has annual and lifetime limits on how much you can give without triggering taxes, and a tax advisor can guide you through the best way to structure these gifts.
- Estate planning — Whether you’re setting up a trust, planning your will, or considering how to pass on assets to your heirs, the decisions you make now can have significant tax consequences later. A tax advisor can help you minimize estate taxes and ensure your loved ones receive the most from your estate.
- Making significant charitable donations — A tax advisor can tell you the best ways to donate—whether it’s cash, stocks, or other assets—and how to claim the appropriate deductions.
Whatever big decision you’re looking to make will have lasting effects on your financial health, so make sure you’re coming into that decision with the best tax advising strategies in play.
If you have any of these big decisions on the horizon, now is the perfect time to reach to get some tax advising strategies in your tool belt. I’m here when you’re ready:
Tax strategies from someone you can trust,
Susan Wilklow