Do You Need a Tax Projection?
Disclaimer: This is 100% not tax advice because we are not tax counselors, tax preparers or accountants. We just get to hang out with them.
Wondering why you should have your end-year tax projections? If so, there are many reasons why you need them. Besides helping you project your tax returns for the coming year, they can help you get ahead and avoid tax surprises.
What is a Tax Projection?
Having a year-end tax projection is done is like playing a scrimmage game. It’s a way to prepare for the real thing. A tax projection is created by your accountant or tax preparer. It’s a very rough draft of what your tax filing will look like for the year. It’s done before the year is over and usually in mid-November or later. And your accountant may prepare in an advance of a year-end tax planning meeting with you or during the meeting.
A tax projection summarizes how your future tax return will look based on the year you’ve just had. In the broadest sense, a tax projection should be able to help you understand what you’ll either owe or receive in the form of a refund for your federal and state income taxes.
Who Should Get a Tax Projection Prepared?
Anyone can request to have a tax projection prepared, but it’s most valuable for anyone who owes income taxes but may not have had them withheld. In other words, self-employed folks, freelancers, small business owners, or anyone who receives income outside of regular employment and traditional earnings.
When you can leverage the tax code the way self-employed folks, freelancers and small business owners can, it’s worth allowing your accountant to spend some time to strategize.
How do I Get Started on My Tax Projection?
Reach out to your accountant or the person that prepares your taxes and find out if they can prepare a tax projection for you.
What information will you include in a Tax Projection?
Here’s what you’ll need to submit to your tax preparer in order to have a projection completed:
Current pay stub with pay withholding and retirement deductions.
Current year financial statement from your business (partnerships, sole proprietorships, corporations, or rental premises). Sometimes your accountant will want access to your bookkeeping data as well.
Losses or gains from stock, tangible business property, or real estate transactions.
Anything included in the previous year's taxes and is still applicable to the current year.
A detailed account of any changes to your circumstances. If, for example, you got married or divorced or had a child.
Projected business income and expenses for the remainder of the year.
Payroll reports for your business.
Current statement that shows the interest you’ve paid this year for any long-term debts.
Benefits of Tax Projection
You may be grappling with this question: ‘Do I need a tax Projection?’ Especially for self-employed folks, the answer to it is yes. A tax projection is not just about figures. It provides very critical information about your financial situation and helps you do the following:
Eliminates Surprises: You do not want to be surprised by an unexpected tax bill. Understanding whether you’ll have a five-figure tax bill come April or whether you’ll be receiving a few thousand as a refund can help you financially plan in the relative short term.
Strategic Planning: A tax projection is part of annual tax planning where you may consider how certain financial decisions impact your taxes. For example, determining bonuses for your employees or weighing the options for the type of retirement plan you may want to participate in and how your contributions may impact your tax return.
Minimizes current and Future Taxes: While many folks understand and accept the necessity of paying taxes, they also want to find the balance between paying their fair share and understanding ways they can reduce their tax liability.
Maximizing returns: Tax projection can help investors in maximizing returns from their investments. What investors should consider is what remains from their investments once taxes are factored. So, tax projections help to diversify your investments for optimal returns.
Effectiveness of a Tax Projection
What makes a tax projection effective is when you use it in the context of all the additional information about you. We consider all the details of your financial plan, and therefore we advise you accordingly.
Your tax projection agent must be informed about your lifestyle today, your goals for the future, and what milestones you have put in place. In this way, we can get ahead with the financial situations that might change.