YFP 369: 10 Common Tax Blunders To Avoid (From 2023 Filings)

Sean Richards, CPA and Director of YFP Tax, talks about the 10 common tax blunders he saw and how to remedy those mistakes to optimize taxes in the year ahead.

Episode Summary

July might not seem like the time of year to think about your taxes, but for Sean Richards, CPA and Director of YFP Tax, it’s a great time to make projections for the year ahead and remedy any blunders from last year’s return. 

Reviewing 10 common mistakes he saw made with taxes in 2023, Sean breaks down ways to optimize your tax plan from utilizing HSAs, to adjusting withholdings, to making sure any side-income is planned for appropriately. Sean’s biggest piece of advice: planning ahead can help avoid these mistakes and can optimize your tax situation.

About Today’s Guest

Sean Richards, CPA, received his undergraduate degree in Corporate Finance and Accounting, as well as his Master of Accountancy, from Bentley University in Waltham, MA. Sean has been a Certified Public Accountant (CPA) since 2015 and is currently pursuing his Enrolled Agent certification. Prior to joining the YFP team, Sean was the Senior Treasury Manager at PRA Group, a global debt buyer based in Norfolk, VA. He began his career at American Tower Corporation where, over 10 years, he held several positions in audit, treasury and accounting.

As the Director of YFP Tax, Sean focuses on broadening the company’s existing tax planning and preparation operations, as well as developing and launching new accounting offerings, including bookkeeping, payroll, and fractional CFO services.

Key Points from the Episode

• Tax blunders and optimizing tax situations with a CPA and tax director. [0:00]
• Common tax mistakes and how to avoid them. [3:13]
• Tax planning strategies and common blunders to avoid. [9:33]
• Optimizing retirement contributions and HSA benefits. [12:59]
• Tax deductions and filing status, with a focus on maximizing savings. [17:31]
• Tax planning strategies for side income sources. [22:05]
• Tax blunders to avoid, including not making estimated tax payments. [26:14]
• Tax planning for small business owners, including extension deadlines and investment activity. [32:18]
• Tax planning and law changes, including energy credits and potential future rate increases. [35:44]
• Tax planning for pharmacists and households across the country. [41:34]

Episode Highlights

“Doing a projection mid year and identifying that you’re going to have a surprise bill or refund at the end of the year, or at least beginning to see that it’s trending in that direction allows you to begin fixing all those problems before they even become problems.” -Sean Richards [7:38]

“For small business owners or for a side hustle, when we’re doing projections about where you expect the business to land in profit and loss this year, and you have a pretty good idea, or at least you hope you do. But that can always change for anybody, not none of us can see the future. But the point here is, at least giving it some thought and trying to come up with a number and planning accordingly.” – Sean Richards [24:16]

“It all comes down to planning. To the extent you’re able to identify any kind of gaps in where you expect to owe money at the end of the year and can close them now whether that’s making estimated payments directly to the IRS or adjusting your withholdings, it’s much better to fix it now and get ahead of it.” – Sean Richards [31:57]

Links Mentioned in Today’s Episode

• YFP Podcast 165: The Power of a Health Savings Account
• YFP Blog: Why I’m Not Using My Health Savings Account to Pay for Medical Expenses
• YFP Tax – www.yfptax.com 
• Your Financial Pharmacist
• Your Financial Pharmacist on Facebook 
• Your Financial Pharmacist on Instagram
• Tim Ulbrich on LinkedIn
• Sean Richards on LinkedIn
• YFP Disclaimer
• YFP Newsletter

Episode Transcript

Tim Ulbrich  00:00

Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast where each week we strive to inspire and encourage you on your path towards achieving financial freedom. On today’s episode, I welcome CPA and YFP Director of Tax, Sean Richards, onto the show to discuss the 10 most common tax blunders that he saw pharmacists making during the recent tax season so that you can avoid these mistakes and optimize your tax situation. To learn more about our tax and accounting services you can visit yfptax.com. Alright, let’s jump into my interview with YFP Director of Tax Sean Richards.

Tim Ulbrich  00:41

Sean, welcome back to the show.

Sean Richards  00:43

Thanks for having me. It’s always a pleasure to be here.

Tim Ulbrich  00:46

So have you had a chance to recharge, recover? It’s now July. Tax season is behind us. But I know that work can linger on, that’s the nature of the business. How are you feeling at this point in the year?

Sean Richards  00:58

Yeah, I’m feeling good. Projection season. I mean, by the time this comes out, we’ll probably be in full swing there. But our projection season is going to be kicking off soon for most folks. But again, you know, we have some folks that are more complicated that we’re still kind of wrapping up 2023. Now, all by design, that’s where we’re taking the time in the summer where other accountants might be sleeping, I am catching up on some sleep, but also using the time to wrap up some of the more complicated returns, make sure we’re optimizing things for those folks. Maybe those projections are a little bit later in the year. So yeah, I’m feeling pretty good. I mean, there’s a little bit 23 stuff still in the works, but mostly close the book there. Looking a lot towards 24 and even 25 and beyond. So feeling refreshed.

Tim Ulbrich  01:38

Well, I’m convinced you’re gonna look back at this season of life as a blur at some point. I mean, you got young kids, tax season and owning business in that season. That’s a lot going on at once. So kudos to you and the work that you and the others have been doing on the team. So give us a rundown. You mentioned there’s some work still to be done individual business extensions. That would include Tim and myself as well. So we’re a couple of the stragglers, but how many returns have you in the team done this year on the federal and state side?

Sean Richards  01:50

On the federal side, we’ve probably locked down about 160 returns or households at least. So you got to factor in that you’re gonna have, you know, if you’re filing separate there, that’s that’s double on those returns. And then for each one of those, I mean, I’d say for each one, you probably average at least a state, because some folks have more states, some folks are in states like New Hampshire that don’t have state income taxes. So probably at least double that on the state side. And then you know, some some couple dozen or not, maybe not a couple of those in but a few business returns on top of that, and yeah, it definitely adds up quite a bit. So there’s only a couple hanging out there right now. If you’re listening, by the time you’re listening, you’re probably actually going to be filed unless you’re Tim Baker and haven’t submitted any of your documentation yet, but everybody else should be all set by the time you’re hearing this. So yeah, we did quite a bit this year. Maybe not as many number wise as before, but definitely, you know, more complex returns where we’re able to get in there and really do that maximization during the year. It’s awesome. 

Tim Ulbrich  03:13

does Ohio still win the award for the most difficult state to deal with? Or do we have a new winner this year? 

Sean Richards  03:20

No, Ohio still number one, as far as most difficult, just given the different municipalities and how you know, some of them are part of the RITA system some of them are completely not not the worst as far as the worst state tax liability that probably be somewhere out west California, Oregon’s up there but yeah, Ohio, I think still is the most annoying. 

Tim Ulbrich  03:41

Our tax liability here in Ohio very friendly, especially for small business owners. Grateful for that. But the bureaucracy of the RITA system, known as the regional income tax authority, shout out to them for listening wish I can assure you they’re not listening. But makes it very difficult because not everyone is in a RITA and just the complexities of dealing with that. So certainly feel for you and others during the season when you’re dealing with the nuances of a system like that. So anyways, not what we’re here to talk about. Let’s jump into the most common mistakes that you saw pharmacists making, the blunders during the tax season. Really an opportunity for us to learn and opportunities, were in the middle of the year. And we’ll talk about the importance of doing projections and looking ahead, but as we hear some of these common mistakes or blunders, it’s a great reminder of what tax planning can we be doing throughout the year. So we’ve compiled 10 I’m sure there’s many more and there’s some layers within each one of these but let’s jump into our list number one, on the list. Perhaps the most common probably will always be the most common is getting a surprise bill or refund at filing. What’s the usual cause here, Sean of some of these unwelcome surprises.

Sean Richards  04:56

And the reason we always have this number one we probably always will unless there’s some sort of broad tax reform in this country is that there’s so many different things that can cause that to happen, that I couldn’t even begin to answer. I mean, I can give some examples, you know, you could under withhold, you could have a side gig and not have, not plan accordingly. But, I mean, we have 10 things on this list, or I guess nine, not including that first one. And they all can kind of result in that number one issue of getting that big refund back, which, you know, that one might surprise some folks, because you might hear that and think, Well, what’s wrong with getting a huge refund back. But if you’re getting $5,000, back in April, that’s $5,000, that you could have been utilizing more efficiently, evenly throughout the course of the year. So you know, that side or the worst side, even, you know, the other opposite is owing that at the end of the year, and nobody wants to have that. So there’s just so many different things. We’re gonna hit on a bunch of them while we talk through this. But I mean, to even start talking about what the causes of that could be. I could be here all day. 

Tim Ulbrich  06:00

Endless possibilities, we’ll get to those throughout the list of 10 of where the most common ones are coming from. As you mentioned, it’s the surprise bill that causes the most pain, right? Even though this year, the number of people that reached out to us post tax deadline, say, hey, I’m interested in learning about what you offer for tax services. If they came after the tax filing deadline, I can assure you that most of them were because, hey, I just got through that that was a mess. I owed money. I don’t want to ever do that again. Right. So the good news is, there are remedies to that problem. There are solutions we can put in place, there are planning that can be done. And changes are going to happen. You know, as we think about the things that can result in those surprise bills that might be causing that to be the case. And so we can with diligent planning, be able to make sure hopefully, that doesn’t happen again in the future. So to that point number two on our list, which is the remedy to the surprise biller refund. Number two is not performing a tax projection. And Sean, talk to us about why this is important, when the projection should happen, what we’re looking at in doing that projection, and to be frank, most people aren’t doing this. 

Sean Richards  07:10

Most people aren’t. I mean, pretty much anybody I talked to who’s not a client working with us, has never really even heard of doing this or they’ve done something like it, but it’s not as formal of a process. And it may not be fair to start with number one being the overarching problem for all tax returns. And then number two sort of being the solution. And if you didn’t do that, that’s our, our issue. But frankly, I mean, not doing this piece really is the biggest second issue because doing a projection mid year and identifying that you’re going to have a surprise bill or refund at the end of the year, or at least beginning to start to see that it’s trending in that direction allows you to begin fixing all those problems before they even become problems really. And so a tax projection is basically just doing a little bit of an estimate of what your your where you expect your tax return to be at filing time. And as silly as that sounds or as simple as it sounds, it’s not something that a lot of people do. And a lot of it’s because you know, tax returns, there’s a lot of complicated or not complicated, but there’s just a lot of different inputs that come into it, you have your credits and your deductions, and you have various sources of income and having all those pieces kind of in your brain and trying to think about how they’re all being covered off. And then getting to the end of the year. And throwing it all on paper is is just chaotic. So doing something around this time of year, or at least mid year for your kind of tax cycle. So if you’re filing every year around tax day, or in the springtime, mid year, July, August, great time to be doing it. If you’re maybe extending and you’re more complicated, and you’re filing a little bit later in the year, you know, you can kind of flex accordingly. But basically, you want to give yourself enough time where you’ve seen enough of the year that you know kind of what’s been going on, what you expect to have happen throughout the rest of the year and maybe even early next year. But you also have enough time to make adjustments based on that. So you don’t want to do it too early. You also don’t want to do it too late. And ideally, you want to have your prior year return kind of solidified and everything to use as a basis. So yeah, I mean, again, it’s it sounds like a simple kind of concept. But it’s something that a lot of people don’t do, and just that one little activity will open up so many areas for you to improve your tax situation every year. It’s outstanding. 

Tim Ulbrich  09:33

These are the situation that again, there are endless possibilities. Right. You know, I’m thinking of the common ones that I’ve heard you talk about, hey, we bought a rental property. We switched jobs, you know, significant change in income. Got married. We had a child. Started a business, a side hustle. I mean, there’s there’s so many things that can adjust and change what our tax liability is going to be. I mean, I just lived this firsthand with you, Sean. As we think about our situation, we pay quarterly estimated taxes when it comes to the business income. When went to go make our first quarter payment, you know, we did kind of rough rough calculations number. We’ve got a well oiled machine process system that you’ve helped us develop internally. Made that payment. And then we said, hey, when we get to the quarter to like, based on what happened last year, my individual situation, I’ve got four kids single, single income in the household, let’s do a projection. And then from there, figure out what is the amount that we should be looking at based on Q2. And the reason why that was really important in my own plan is, as we had suspected, I probably didn’t need to make a Q2 payment or a very big one, because of what we made in Q1 and what the liability was projecting to be for the rest of the year. So to your point, we’ve got to have that return, complete or near complete. We’ve got to have some idea of what may or may not be coming here in the second half of the year. And then you’ve got some cool software that you can run some analyses. And we can put a visual to this, which I think really helps people understand how the tax liabilities work and how we want to think about making these payments.

Sean Richards  11:02

Yeah, I agree seeing it visually and kind of understanding Ah, okay, that’s where that comes into the equation. And this is where this is going to kind of fall into it. And I mean, even something like that. My first question back to you is, you know, what do you expect? I mean, I guess the answer is coming from me as your accountant. But what do you expect your business to have in profit or loss at the end of the year? And a lot of people don’t even really think about the fact that they have to answer that question first before we can even get to that. So it really starts getting you thinking about all the different inputs that ultimately work their way into that one little line on your return.

Tim Ulbrich  11:05

And this is where you can see like, hey, if we pull the lever, and we max out the HSA, or we put money into more into the traditional 401k, whatever might be the outcome, like what does it actually change when we get to the bottom and we look at the tax liability. So really powerful if we can get that projection process in place. So that was number two on our list of 10 common tax blunders to avoid. Number three on list is undervaluing the power of the HSA. We’ve talked at length on this show about health savings accounts. We’ll link to in the show notes our previous episodes on HSAs. Talk to us, Sean, it surprises me a little bit to be honest, that we’re still seeing the HSA be underutilized.

Sean Richards  12:16

Yeah, I think it’s one of those things and I think you, you certainly don’t see it once you’re kind of working with us. And you’ve been able to kind of see the power, hear us talk about it, or visually show, hey, this is what could have been or anything like that. But I think it really kind of comes down to sort of just the education in the country broadly about some of these things like 401K, HSA kind of everything. You know, you get thrown into your first job out of college, and you have to sign 1000 pieces of paper in your onboarding stuff from HR and put you know what percentage of this you want and traditional Roth and all these numbers kind of get thrown out there, and you lose the benefits or you think, hey, maybe I’ll I’ll throw some percentage here and some percentage here and some percentage here. And that’s, you know, obviously a pretty good strategy as far as spreading things out and stuff, but HSAs have a triple tax benefit. Most if any other retirement vehicles have that. So by not maximizing that HSA, if you have that available to you, you’re really losing out, even if you are kind of spreading the love to other places first, I mean, you want to really be able to get that triple benefit there before you start going elsewhere. So when I say triple tax benefit, when you make your contributions this year, or if they’re coming out of your paycheck, that’s a tax deduction, or it’s coming out of your taxable income, reducing your taxable income, the growth of the investment tax free. And then when you take it out, assuming it’s for qualified expenses, also tax free. So usually you’re getting one maybe two of those, like you tax free now, but then you pay the tax in the future, or vice versa. This is the only one that has that that triple, so it’s awesome. The one thing I will say there is that on the flip side, I’ll see plenty of times where you know, you get excited and sign up for the first time and might miss you know, you’re working a couple jobs or something and over contribute. So it as long as it’s something that you catch, not a problem, we can fix that even if we get past the end of the year, you know, you can have those things returned. But something to try to get ahead of, as I say with great power comes great responsibility. So a lot of power with the HSA. But rules just like everything else to keep track of and limits and everything. So you just want to make sure that you’re staying on top of those two.

Tim Ulbrich  14:28

Yeah, tracking expenses, are they qualified, making sure you’re using it appropriately? All important things. You know, I like to refer to the HSA as a legal tax avoidance vehicle. Right. So that’s a good one. To your point, we don’t see that in other accounts. And so, you know, I think there’s always the debate of, Hey, am I actually going to potentially need these funds for qualified health care expenses, and if so great, we can get the tax benefits. If not, and or I’m not projecting that I’m gonna need it, then there’s some options to use this as, you know what we call kind of a stealth IRA potentially, another option when it comes to long term savings and investing. Alright, so that’s number three. undervaluing the power of the HSA on our list of 10 Common tax blunders to avoid. Number four is not optimizing retirement contributions. Tell us more here. 

Sean Richards  15:21

So, that kind of follows the HSA thing, as you were sort of alluding to there. And HSA is kind of like a retirement vehicle. It’s sort of intended as being used for health expenses, but it can also kind of be used as a retirement vehicle. So that is, can fall under this umbrella. But what I’m talking about here is, you know, you hear IRAs, 401Ks. Another great example of where you start your first job, they start throwing all these things out at you, you know that there’s tax benefits, you know that you should be putting money into these things, but how to actually optimize that. And not only that, but how to actually optimize it for whatever your broader financial strategy is. Because I’ll have folks come to me and say, Hey, should I max out my 401K? Well, first off, do you mean traditional 401k? Or do you mean Roth 401k? Traditional, you’ll have the tax savings now, Roth you get in the future. And you know, that begins to go back to well, though, the question that I’ll get is, Well, which one should I do? And the answer is, you know, what is your broader financial plan? Where do you think you’re going to be? I mean, I’ll tell you now, as the tax guy, traditional 401k is going to give you the tax savings now, you look good, I guess, when we do our returns, but is that really what’s going to be the best for you and your financial situation, given where you expect to be in the future. So knowing that breakdown, I mean, even just I talk about IRAs and 401K’s people use those interchangeably. They’re very, very different. They’re very, very similar. They have, you know, similar components, where you have traditional and Roth to choose from, you can have pre tax components and non pre tax components. But they’re very different in the sense that there’s different limits that apply to them. There’s different phase outs, whether you’re in, you know, make more income and everything. So just understanding even Hey, what, what options do you have? Let’s start with that. And then from there, what are your financial goals? And how can we make the options available to you best suit those financial goals? So there’s just a lot being left on the table there. And I think it all comes back to you know, not planning ahead of time. 

Tim Ulbrich  17:26

And Sean, your your example of you know, when somebody comes to you and says, Hey, should I do Roth? Should I do traditional? And you say, it depends without saying it depends, like Tim Baker says it depends. But that’s really what you’re getting to is it does depends, because we can’t make that decision in a silo. And this is why we believe so much in the value of having a CFP and a CPA on your team that can communicate and talk with one another and really look at these decisions, you know, as you’re making a decision on what investment contribution or if you’re approaching retirement, and you’re thinking about the withdrawal phase that has tax implications, has planning implications, you put those two together, and we can start to look at the whole picture and make that decision that’s optimal. Number five, I’m curious about this one, Sean. So you’re referring to number five as quote, wasting itemized deductions? I’m curious, because it feels like with the rise in the amount of the standard deduction, that itemized deductions maybe aren’t as prevalent or common. So what are you referring to here?

Sean Richards  18:27

Well, that actually is what you just said, is actually one of the things that I’m kind of getting at there. And that’s kind of not factoring in the fact that the standard deduction is getting higher every year, and it kind of continues to go that way. And so, you know, traditionally, we’ve all kind of had this idea of once you buy a house, you’re gonna itemize deductions, and you have all these sort of miscellaneous deductions that come into play. But a few years ago with the the tax law changes, and the Tax Cut and Jobs Act, a lot of that stuff went away, and a lot of the deductions were either limited or or outright removed in favor of that standard reduction going up. And when I say wasting, you know, there’s a couple of different things here, but particularly, what you just said is, if you have a lot of itemized deductions, but they don’t hit that standard deduction amount, and you end up still taking the standard deduction, which is what we would typically do, you know, barring any other kinds of reasons why we couldn’t, a lot of folks feel like they’ve lost their itemized deductions. They’re like, wait a minute, wait a minute. So you’re telling me I, I put $1,000 towards charity last year, I paid this much toward my mortgage, and I paid this much in taxes, and I’m not, I don’t get credit for that?

Tim Ulbrich  19:35

That’s what the standard deduction is! 

Sean Richards  19:36

Yeah. And it’s hard to say, you know, you don’t get credit for it. But the standard deduction is more, so we’re going to take that and, you know, that’s, that’s what’s gonna give you the best savings. Now, there are ways to maximize that if you do kind of look at it ahead of time. You might have the ability to do something that we call bunching where you say, hey, let’s try to pull itemized deductions into one year and itemize then and then have less than another year and take advantage of that higher standard deduction. Or you know, you have PSLF is a huge thing, right, of course, with pharmacists. And typically when we have folks that are doing PSLF, we want to look at filing status and potentially filing separately. And when you file separately, you that brings in new itemized deduction, when you itemize, your spouse can’t take the standard deduction, vice versa. So you have situations there where you have one spouse that’s paying a bunch towards mortgage interest. But at the end of the day, you both take the standard deduction, there’s just a lot of things that can kind of come into play there. And that’s one of the ones that you really don’t have a lot of flexibility with after the fact. I mean, that’s the case with a lot of tax stuff. But this in particular is one of those things that you really want to think about it ahead of time, like where what filing status, are we going to be possibly filing as, what’s the standard deduction, what do we have for itemized deductions and try to maximize it as best you can? Because there’s nothing worse than telling somebody, yeah, that money that you donated, I mean, it’s great for you morally, but it’s not gonna help your taxes this year.

Tim Ulbrich  21:04

So Sean, let’s talk about bunching a little bit more, I think this is something we’re seeing more common among our clients and questions, and maybe just an awareness and an education about who this might be a good fit for. So if I’m following this correctly, if we if we look to 2024, the standard deduction for married filing jointly is going up to $29,200. So if someone’s listening, and they were to itemize, which again, it wouldn’t make sense if it’s below the $29,200. But if they weren’t itemizing, it’s $25k, $26k, $20k. Somewhere in that range, or ish, like, that’s where you start to look at and say, Oh, are there opportunities that, hey, maybe some of the giving we have planned for next year, or other things that we could push into this year? Maybe we itemize one year? And then the next year we go standard? Am I following that? right? 

Sean Richards  21:50

Exactly. And it’s one of those things, this is an example where the visual, I think, makes the most sense, because we can put a couple examples next to each other and say, like, Hey, this is what it’ll look like if we take the standard deduction every year. But this is what it looks like if we sort of shift these things around. And for some folks, you might not even have the ability to make those changes, right. Like if you’re, if the primary driver of your itemized deductions is your mortgage interest, and you’re not really doing any charitable contributions, there’s only so much you can really do about your mortgage, that I mean, maybe you can prepay interest or something, but that’s not going to change a lot. You have other folks who may have, you know, mortgage or lower mortgage interest, taxes get capped at 10k, too, as of right now, with the with the law changes I was talking about earlier. But you also so you might have some people who have a huge number of charitable contributions, and they can pull that lever and like you were kind of saying, hey, maybe we pull them into this year, or defer to next year. But the big thing I’ll say there is that a lot of people will then kind of come back to me and say, well, that doesn’t fit my giving strategy. I, I do a certain percentage every month, and it goes that way. And I don’t want to change that because that would change, you know, the way that the church is able to use my money or something like that. And that’s perfectly fine. I just want to have those discussions ahead of time, and be all on the same page and say, Hey, we’re making this decision for a reason, not looking back and saying, ah wish we had done this, you know, last year, maybe next year.

Tim Ulbrich  23:20

As we talked about all the time on the financial planning side of the business, right? financial decisions, or combination of the math, and how do we emotionally feel about those decisions, right? Same thing here, we might look at the giving strategy and say, You know what, we’re willing to give up a little bit of potential tax savings, because we want to give in this matter, so be it. Let’s just look at the options and what we have available. Number six is not saving for taxes when earning additional income. I’m laughing because I know this comes up all the time where you know, side hustlers, new business owners, people that are launching something, they’ve got some revenue, and then there’s a oh, crap moment, right?

Sean Richards  23:52

Yeah. And this one is tough because I mean, no one has a crystal ball. Right? So as I was just saying on one of the ones before, my question to you, when we’re doing projections is where you expect the business to land in profit and loss this year, and you have a pretty good idea, or at least you hope you do. But that can always change for anybody, not none of us can see the future. But the point here is, at least giving it some thought and trying to come up with a number and planning accordingly. And the biggest thing I would say here is not only just thinking about it, kind of in a one track mind, really thinking about the many different implications that side income can have. If you have self employment income, you’re going to have regular ordinary income tax on that just like you would if you’re working a W2 job, but you’re also going to have self employment tax on that, which is basically the government’s way of saying hey, we want the FICA that you’d be paying, we’re withholding as an employee and the FICA that you usually don’t see your employer pay for you in a W2 job. And that’s, you know, 17%. So all of a sudden you have that plus your ordinary income tax rate and you’re looking at 30 something percent at the end of the year. And now again, there’s different deductions that come into play, there’s a lot more that go into the broader calculation, but at least you know, getting ahead of that and saying, Okay, I’m expecting my business to earn 50k this year of of net profit. I’m going to have to pay income tax on that, self employment tax on that, state tax on that, at least saying, Alright, this is what I expect my liability to be at the worst. And putting aside a percentage of that or something. Again, and I probably sound like a broken record, it all comes back to planning and projecting and thinking ahead, because nobody wants to get to the end of the year and have their accountant say, Awesome work. First time, you know, doing the side gig, you made a bunch of money, now you owe a bunch of taxes. So again, just getting ahead of that putting the money aside, doing the math on it, thinking about those other taxes. If it’s rental income, you don’t have self employment tax, but you have passive loss limitations. So if you have a rental property, and you have a lot of losses there, you’re not necessarily going to be able to take those against your active income because of different limitations. So probably now starting to put people to sleep. But it all goes back to really trying to think about where those other side income sources are, and what is possibly going to hit your return at the end of the year.

Tim Ulbrich  26:13

Yeah, and, you know, to be fair, we also have to be realistic, right? So for new business owners, new side hustlers, you know, you can only do so much planning. Now, once you’ve got a couple years under your belt, you kind of get an idea where things are going, you know, just like we do in the business, you do some projections, even then we get it wrong, but we’re within the realm, right, because we’ve done it for seven or eight years, when someone’s launching a brand new business, your side hustle, you know, they may think they’re going to earn $50,000. And they end up earning two. Or they think they’re going to earn two and earn 50. Because they just don’t know, right at that point. So I think in those cases, you know, you don’t have a great bookkeeping system, that’s going to take time for that to build up, of course, but the point being set aside a percentage of the income to be conservative, call it potential tax. And then as you get further along, there’s going to be more detail to be done and what those projections are, but just don’t spend it all and have nothing there for tax.

Sean Richards  27:08

Right. Just put something there. And the other thing that that you mentioned that I almost forgot about is the fact that I’m kind of just broadly saying, Hey, Tim, what’s your profit gonna be in your business at the end of the year? For a lot of folks, you know, just figuring that out is difficult, you might be able to say, hey, I have a client that’s going to pay me $10,000 this year. And so I’m going to $10,000 of income. Well, yeah, that’s true. But we’re also going to have expenses. And the first question I get are, well, what expenses can I deduct? So asking those questions now, and talking about the different things that are deductible, what fits as a legitimate business expense, all those things is much better than at the end of the year, sending me a 1099 and saying, Hey, I made 10 grand. I don’t have any expenses. Let’s try to figure it out. Right. It’s just trying to get ahead of those things and thinking about it now. That’s where you can start making decisions and not being reactive.

Tim Ulbrich  28:03

Number seven, on our list of common tax blunders to avoid, many of these coming from the 2023 filing year that we just wrapped up is not making estimated tax payments. And, you know, the question here being, I think, who does need to be making estimated tax payments and what’s the blunder here? 

Sean Richards  28:22

Yeah, and I probably could have reworded that a little bit. But estimated tax payments, it kind of follows right after the the question above in the sense that most folks here are probably going to be folks that earn additional income. And when I say additional income, I mean income from sources non W2 where you don’t have those withholdings. So typically you think you get your paycheck every two weeks. And the employer, the payroll company is withholding your share of FICA, federal income tax, state income tax and remitting that to the government. Because think about your least financially savvy friend at the end of the year, if they didn’t have that happening, would they be able to pay their taxes? Probably almost certainly not. Because I see a lot of financially responsible folks who are very, very well educated and great with their cash and they still struggle the to put money aside the end of the year, let alone you know, people who are completely struggling. So the government recognizes this. They want your your cash on a regular basis. And for most folks, that’s going to be withholdings. However, if your withholdings aren’t covering off for whatever reason, whether you’re not withholding enough at your W2 jobs, or as I said is more of the common case you have side income, you should be making estimated payments to supplement it. So the rough rule there is if you are going to owe $1,000 at filing time, you should be paying estimated taxes. The first question I would probably get from someone is am I expected to owe that? And then of course the answer is well, let’s do a projection and find out. But basically, yeah, once you do a projection if you’re looking at this, and you can do it multiple ways where you’re starting with your business, but whatever, you gotta you have to keep in mind all the different pieces, right? Like I, a lot of people will say, Hey, I have this business, how much should I put aside for it and just like the example we just talked about, if I told you to put aside 30% to cover off on your income tax and self employment tax or whatever, that’s not necessarily going to work for you because you might have a ton of credits from children or you might have, you might have bought an EV this year and are getting a big credit. So you have to think about all the components and then look at and say, All right, am I going to owe or am I not going to owe. And when you get to that point, if it’s if it looks like you’re going to owe more than $1,000, either adjust withholdings or you should be paying in regularly. So estimated taxes is basically whatever that balance is that you expect to owe. They just want you to pay that in evenly quarterly throughout the year. It’s not perfectly quarterly because the IRS can’t be that easy about things. But it’s basically saying, Hey, we don’t have withholdings, so send us in that piece that you’re missing, that you should be withholding every few months to supplement. The one big thing I will say here is that a lot of folks will assume, hey, and especially with extensions, right? If you and I’ll say this till the day I die, if you file an extension, it gives you six months to file, but not to pay your ta liability. Like a lot of folks will say, as long as I pay my tax liability by tax day, I’m good to go no matter what. I mean, even if I do an extension, as long as I pay that money, then I’m fine. But the piece that I try to hammer home for folks is that even throughout the year kind of thing, the quarterly thing I was mentioning, so if you’re expected to owe 10 grand, and you go at the end of the year and pay that in April, when you file, the IRS is going to be angry and say hey, you should have been paying that in the year here. And they’re going to slap you. Yeah. So again, broken record, all comes down to planning. But to the extent you’re able to identify any kind of gaps in where you expect to owe money at the end of the year and can close them now whether that’s making estimated payments directly to the IRS or adjusting your withholdings, it’s much better to fix it now and get ahead of it. Then the flip side and trying to you know, request a penalty abatement in the back end.

Tim Ulbrich  32:18

Yeah, just to reinforce a an important point you made, Sean, is that if you do file an extension, which to be clear, like is not a bad thing. 

Sean Richards  32:26

Not at all whatsoever. 

Tim Ulbrich  32:28

Yeah, we really believe as we say over and over again and right over rushed. And there’s a value in the extension process. But that is not a pass on paying your tax that is due. So there’s work that has to be done, when you go to file that extension to figure out like, Hey, do we have a tax liability due, so we can make that payment, but we’re giving ourselves an extended time to be able to finish everything up and actually get the return in.

Sean Richards  32:52

And I mean, that might have even been an extreme example, like if you didn’t file an extension, even which again, I think extensions are one of the most underutilized things in the tax code. But if you didn’t do that, and you still owed at the end of the year and paid all that money in on December 31, the IRS is still going to be mad because they’re still going to say you should have been paying it in January, February, March, April. So the name of the game here is just making sure that you’re not ever getting too far away from where you expect your tax liability to be and what you’ve paid in any given point in the year. 

Tim Ulbrich  33:26

Which is why for the small business owner listening, this is why it is so important to have a system that is operationalized in your business where you have books and records that are being kept, whether it’s quarterly, whether that’s monthly, whatever your business needs, and you’re able to then use that information to feed into what you need to be making in terms of those estimated payments. So I’ll preach that. And I’ll preach it saying, Hey, we have it’s taken us a while to kind of figure this out. And to get into this rhythm and it’s not going to be perfect. It’s going to be you know, messy as you’re developing it. But so important over time as you get some stability in the business to have that type of system and predictability. Number eight on the list is overlooking investment, activity. Activity being the key word here, right?

Sean Richards  34:11

Yeah, so this is a lot I could you know, another example of one where I could spend a whole session or whole podcast going through this. But really, the big thing here is just thinking about the different types of investment activity that you may have. And right like you just said activity is kind of the name of the game here. So just because you have investments doesn’t necessarily mean that you’re going to have a tax liability or any kind of tax implications associated with it. But thinking about what types of activity you had going on in a particular year and making sure you’re getting ahead of that is going to be crucial, especially now with all these different types of types of stock performance incentives that folks have so restricted stock units, RSUs; employee purchase, employee stock purchase programs, ESPP; ISOs, incentive of stock options. All these different things, they’re all great. It’s just one of those things where you want to make sure you’re at least understanding the tax implications beforehand, because for some of those, you know, you won’t actually have a any kind of thing to do necessarily, or liabilities to take care of until you actually go and sell some of those shares. Typically, that’s the case. But again, just understanding how that works, knowing that you might need to get additional information to your accountant, hopefully us, to be able to adjust basis for taxes that you’ve already paid. I’ve seen a lot of people who paid double on some of these things, because they already paid when they were when some of the stocks vested. And then kind of paid taxes on that a second time when they sold those, those stocks. So lots to think about there. I mean, there was higher interest rates last year across the board. So a lot of folks had higher investment income, like interest income and stuff, which is great. But again, just something you want to plan for, there’s usually no withholdings there, you start making good money, the net investment income tax comes in. So that’s just a little additional tax on investment income. But it’s one of those things where the more I talk about it, the more people are probably spinning their heads. But a lot of folks have a lot of different types of investments, whether you think you do or you don’t, you know, even just having a few bank accounts and a couple shares of stocks here and there is enough that if you’re making moves on those, those can really affect your taxes. So just making sure you’re taking advantage of anything. And again, really think about the activity that you had in a year. What did I do? Did I sell anything? Did I buy anything? Did I convert anything? That kind of stuff.

Tim Ulbrich  36:36

We don’t typically think about, you know, interest in high yield savings accounts as being significant enough, right, that we have to plan for it. As you mentioned, we don’t have withholdings, right, that come out of your high yield savings account interest. However, when we think about this past year, especially people may have higher amounts in those accounts for people listening to that $50, $100, $150,000 across high yield savings accounts, earning four and a quarter, four and a half percent. That adds up pretty quickly.

Sean Richards  37:01

That’s literally what it is like, and, you know, we would do projections and get really, really close for folks, but be off by you know, a few $1,000 at the end of the year and looking at and saying, Hey, what what was often our, or what did we miss in our in our assumptions when we were looking at this? And a lot of the times we’re under estimating just simple interest income because people had cash sitting in some of the high yield savings accounts. But if you’re in high tax brackets, and you have that net investment income tax coming in, all the sudden a few $1,000 of income is a few $1,000 of taxes. So yeah, not a bad thing. But just something you want plan for.

Tim Ulbrich  37:39

Number nine on our list of 10 Common tax blunders to avoid from the 2023 filings is misunderstanding some of the tax law changes. What what are you referring to here?

Sean Richards  37:49

Yeah, so this one is going to be a little kind of twofold. So typically, when I’ve been saying tax law changes, the biggest things in the past few years have been energy credits. So the Inflation Reduction Act that Biden signed a couple of years ago, really expanded a lot of EV, green, other types of energy efficient credits. And those have been awesome for many folks, lots of good tax savings there. Again, it expanded a lot of things that apply, and it got rid of a lot of the limits that used to apply for some of these things. So there’s a lot of savings to be had. And tax credits. This is that’s what all of these kind of EV and green credits are, they’re their credits, those are dollar for dollar savings against tax liability, as opposed to a deduction, which just reduces your taxable income and really only reduces your tax by the percentage of your of your rate. These are credits. So it’s bang for your buck, the big deal. The only thing I’ll say on the energy credit side is as much as there’s a lot of room to save, there’s a lot of misunderstandings of, hey, I bought a plug in or a hybrid last year. So where’s my tax credit? Well, some plug in hybrids count, but not all hybrids count. Or, you know, I did this work on my house. And I was expecting to only get this much of a credit, but oh, actually, it was solar. So it’s a 30% credit with no limit, you know, you can have the opposite side of that, and planning accordingly with those things. Again, not that it’s necessarily the worst thing in the world to have a big refund. But if you can think about it ahead of time and say, Hey, I’m buying an Eevee this year, and you know that you’re gonna get 7500 bucks back as a credit. Yep, there’s a pretty good chance you can adjust your withholdings this year and get some of that cash back now and not have to worry about it at the end of the year. The flip side, and this might begin to scare folks, but it is thinking about other kinds of broader tax law changes. And when I think about this, I think of the Tax Cuts and Jobs Act sunsetting. Which it’s supposed to be doing in 2026 or at the end of 2025. So a lot of the was things I was talking about the itemized deduction changes, but one that people might not really even have remembered is the fact that tax brackets all went down when that happened. And in a couple of years, those are supposed to go back to the rates that they were. Will that happen? Who knows, we have no idea who will the President will be what, Congress’s makeup will be. But having an eye on that, and knowing at least now, hey, in two years, we’re expecting these rates are going to go up. So being able to plan accordingly and knowing that, hey, in two years, itemized deductions are going to change quite a bit, or the standard deduction is going to change. Getting ahead of those things. I know, it sounds crazy to be thinking a couple years out in the future. But when we’re talking about projections and thinking about pulling levers, those things actually do start to come into play. So I don’t want to scare folks. But it’s one of those things where, you know, all of a sudden, there’s sweeping tax changes, and it’s kind of swept under the rug because of all the other political turmoil and everything going on. So something Yeah, I just don’t want lost on folks. 

Tim Ulbrich  41:02

It’s interesting. You bring up Sean the tax cut and jobs, I remember the passage of that, and 2016, you know, I filed graduated 2008. So I graduated, filed several years before that was in place, but you don’t think about that, right? As well, when when it’s going in the favorable direction of what that means to cash flow. But it’d be interesting, and we’ll see politically what would happen. You know, you can imagine some of the turmoil if that were to go in the other direction and impact on what could be.

Sean Richards  41:29

Exactly and you know, for most folks, your withholdings likely will adjust accordingly. So you’re probably not going to end up with like a huge tax bill, so to speak. But there’s a pretty good chance that in a couple years, you’re going to be paying in more of every paycheck towards the government. Or even worse, if you have a side gig, you might be having a liability building up that’s bigger than it has been in previous years. And if you don’t have a system for saving, you’ll be in trouble.

Tim Ulbrich  41:30

All right on the homestretch number ten on our list, what would it be if we didn’t talk about some of the real annoying stuff under estimating state and local tax complexities. This is your favorite topic, Sean? 

Sean Richards  42:08

Yeah, it is, because we’re probably what I will maybe not one of the few firms. But you know, there’s not a ton of firms probably that are virtual like we are and work with clients across the entire country, a lot of tax and accounting firms tend to be kind of specific to a regional area. So I’m probably you know, in a smaller minority, in a minority of CPAs that deal with this, but it definitely comes up quite a bit with our client base. And I think that’s a notion of, you know, just people doing a lot of traveling and moving. But especially with a lot of the careers now and being able to work remote. You know, you have people working from home part time, full time you have people doing traveling nursing or even pharmacy related gigs like that. And anytime you’re doing work and you’re crossing state borders, there’s most likely tax implications associated with that. And does that mean that you’re going to necessarily have to pay tax in another state, if you were working there briefly, maybe, probably not. But just understanding the different rules around those things and being able to maximize them too. If you’re living in a state where you’re you’re working in a state and living in a state and one has a higher income tax rate than the other, but you have the ability to kind of choose your residency based on the tax rules, you know, that’s something that you’d want to do ahead of time. So just thinking about those different types of things, making sure you’re withholding enough. Local taxes. There’s other states besides Ohio, but Ohio being the biggest one there. I don’t understand how, folks, you know, just working a job down the street can keep up with all those things, but local taxes, understanding where you live, what the school district taxes are versus the residence town tax versus the city town, you know, all these different taxes, it can be overwhelming, just under estimating how complex some of that stuff can be not having a hand on the wheel. I just talked about all those nine things. And those can all be applied to the federal income tax return. We’ll apply them all to the state and local returns as well. So I’m sure folks living in Florida, Texas, Washington, New Hampshire all shut off. But people in Ohio probably crank the volume on that last one there. So definitely not something to take too lightly. 

Tim Ulbrich  44:22

This is timely, and I was knocking on RITA earlier, but we are dealing with a RITA issue this week. And you know, just some lingering things and it feels like every once in a while we’ll get random notices from them for those that have a business that you sell product, you got sales tax. I mean, there’s just so many layers of things to keep up with. 

Sean Richards  44:39

Exactly and it goes back to kind of understanding the tax calculation and how all these things go together. Yeah, and sometimes visually really is the best way to do that and seeing like if I send an email to someone and say, Hey, in Ohio, you have this federal tax you have this schedule C, you have self employment tax. You also have Ohio tax, that you RITA and then you have a tax where you work, but also where you live. And then you also have a school district tax. People are like, What are you talking about? But when you actually look at where it falls into returns, it makes a lot more sense. So doing that only once a year to me just isn’t sufficient given how complex I see these situations becoming.

Tim Ulbrich  45:19

As Sean mentioned, at YFP Tax, we work with pharmacists, households, and others all across the country. So we have a virtual paperless firm that we’re very proud of. We also obviously supplement that with our financial planning services, which most of our listeners are well familiar with that. If you want to learn more about our comprehensive year round tax planning, what’s involved with that, I think we’ve laid out the case of why that is a good fit and a service that many people should be thinking about. But if you want to determine if it’s a good fit for your situation, you get a YFPtax.com You can learn more and book a free discovery call with my partner, Tim Baker to determine whether or not that’s a service is the right fit for you, Sean, great stuff as always, we’ll be talking more tax throughout the year. Thanks for taking the time to come on.

Sean Richards  46:04

Yeah, thank you. Have a good one.

Tim Ulbrich  46:06

You too.

Tim Ulbrich  46:08

As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding material should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. Furthermore, the information contained in our archive newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacists unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacists podcast. Have a great rest of your week.

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