What a Tax Planning Review Looks Like for Our Clients

First things first, we review every single client's tax return for 2024.

Why do we do this?

Many people still self-file (not what I would recommend) and many times people do not give all the info to their tax team. We try and do our best to help on this but things still get missed.

In the past few years we've seen:

• Backdoor Roths get listed as taxable when they shouldn’t have been

• QSBS missed and capital gains taxed owed when they shouldn’t have been

• Charitable giving not reported

• RSUs being double taxed (cost basis reported at $0)

• Profit sharing to 401(k)s not listed since it was done post 12/31

• Solo 401(k) contributions not reported since it was post 12/31

• Wrong things on the p&L and income over or understated

• Form 8606 not done to report basis for backdoor Roths

• No gift tax return filed after superfunding a 529 plan

• And many other mistakes

We need to ensure our clients' tax returns are right and they are not overpaying on taxes because something was missed. 2 sets of eyes are always better than one.

2) Safe Harbor Planning

Once the tax return is done, we can start planning for safe harbor payments for 2025. Remember that safe harbor is how you avoid penalties for underpaying taxes throughout the year. To hit safe harbor you either need to:

• Pay 110% of your prior year tax liability

• 90% of current year

This needs to be done equally through 4 quarters unless you have your tax team annualize your income and you pay taxes based on when it was received (this typically costs extra).

For our clients that expect to make more in 2025 than 2024, we will go with 110% of 2024 and then reduce in Q4 if income ends up lower.

If our clients expect to make less in 2024, then we will quarterly help them track this and make sure they hit 90%.

Let’s say you owed $250k in tax for 2024, this means in 2025 you would need to get in $275,000. As long as you do that, even if you owe $500,000 in taxes, you won’t have any underpayment penalties.

But know that withholding gets subtracted from this. If you withhold $100,000 through your salary, then you would need to get in $275,000-$100,000 = $175,000 throughout the year broken up quarterly, so $43,750 each quarter.

Safe harbor planning is crucial.

3) Actual Tax Liability Planning

We also nail down what we expect you to owe based on the projections we have. This is incredibly important to how you run your financial life.

If you just plan on safe harbor, then you can be way off. Let’s use the example above where safe harbor is $275,000. This means you will want to save $275,000/12 = roughly $30,000 a month for taxes. But if you only do that yet end up owing $500,000, you will be far off.

So we give these estimates so our clients know what to save for safe harbor and for what they will owe above safe harbor come next April.

Without nailing this down, you cannot plan well with the cash in your business or personal life. Time and time again we saw business owners stuck in a spot where they do not know what they can take out because they have no idea what their tax liability will be. What ends up happening is 1 of 2 things:

1. They just hoard cash in the business till April, they pay for their taxes, then they do the same thing the next year.

2. They distribute too much and use those dollars and then do not have the liquidity to pay taxes in April

Both are bad options. This is why we help handle all this for our clients, so they can run their business better and with more clarity.

4) Go through the tax planning moves we will make for the year

The last thing we do is talk through all the tax planning moves that make sense for the year. This could be things that lower their taxes like:

• PTET

• Cash balance plans

• Solo 401(k)

• Profit share

• Maximizing deductions

• Cost seg studies

• Buying vehicles or properties for their business

• Donor advised fund contributions

• Entity election changes

• QBID maximization

• Direct indexing

• Ways to lower tax as they sell their business

• 1031 exchanges

• Selling a rental before the 2 out of 5 year time frame ends

• Etc.

Or it could be things that increase their taxes this year but lower their lifetime tax bill:

• Roth contributions in a 401(k)

• Mega backdoor Roth 401(k)

• Roth conversions

• Tax gain harvesting

• Etc.

Good tax planning starts once your tax return is done (or before if you file an extension), then continues through the year, and gets wrapped up at the end of the year.

If you are a high income business owner, you need to be doing yearly tax planning like this to maximize your wealth!

If you're reaching a point where you feel like you'd benefit from working with a financial advisor, please use this link to apply to work with me. I have room for 20-25 more clients before I will be at capacity. I'd love to help you navigate your financial life. ​Click here to apply →

How to Put $77,000 Into Roth Accounts Every Year

In this week's episode, I break down Roth conversions and how to maximize your contributions through the Mega Backdoor Roth 401(k):