7 Questions to Ask Your CPA (And Yourself)!
It's that time of year! The mad tax dash is upon us as it's time to settle up with the IRS for 2024. In today’s post, I will arm you with some questions to ask your CPA or yourself to help you have a better discussion and plan around taxes.
Setting The Stage
Whether you're eager to file or anxiously awaiting to see your tax due, it's important that you're asking the right questions so that you're taking advantage of what's available to you and pulling the right levers.
You're familiar with the normal drill of gathering your W-2's, 1099s, loan documents, account statements, etc.. Still, there’s more that you can bring to the table to have an educated conversation with your tax preparer or spouse on the matter.
The 7 Questions to Ask!
Drum roll please… here are the seven questions you should ask your tax professional or yourself if you prepare your own taxes using online tax software such as TurboTax:
1. Were there any material changes that happened in 2024?
We're talking about a marriage, separation, births, state residency change, job changes, big purchases (like real estate and vehicles), etc. These will all play a big factor in your filing and tax implications.
2. What will my marginal tax bracket be in 2024?
Knowing the answer to this is EXTREMELY helpful. The US tax system is a progressive one meaning that you pay differing income tax rates on different amounts of taxable income. Your marginal tax bracket is the tax rate assessed on your last dollar of taxable income. Determining your marginal tax bracket can help dictate whether you should focus more on deferring income and maximizing tax deductions (if marginal tax rate is high) or realizing income (if marginal tax rate is low and future years may be higher).
3. How am I planning to minimize taxes over my lifetime and not just the current year?
This question gets to the heart of tax planning vs. tax preparing.
Effective tax planning isn’t just about reducing this year’s tax bill—it’s about minimizing taxes over your lifetime. This means strategically managing income, withdrawals, and investments to optimize your tax situation over the long run. Key strategies include balancing pre-tax and Roth contributions, leveraging lower tax brackets in early retirement, and planning for Required Minimum Distributions (RMDs) to avoid unnecessary tax burdens. Tax-efficient investing, smart charitable giving, and proactive capital gains management also play a role. By taking a forward-looking approach and adjusting as tax laws evolve, you can keep more of your wealth working for you.
4. Should I be contributing more to pre-tax retirement accounts or Roth accounts?
Deciding between pre-tax and Roth contributions depends on your current and future tax brackets. Pre-tax contributions lower your taxable income today, making sense if you expect to be in a lower tax bracket in retirement. Roth contributions, on the other hand, provide tax-free withdrawals later, which can be beneficial if you anticipate higher taxes in the future. A balanced approach—contributing to both—can provide flexibility and tax diversification in retirement.
5. What inefficiencies do you see in my tax plan?
Identifying inefficiencies in your tax plan starts with examining missed deductions, poorly timed withdrawals, and unnecessary tax exposure. Common issues include failing to diversify between pre-tax and Roth accounts, inefficient charitable giving, mismanaging capital gains, or not optimizing Required Minimum Distributions (RMDs). Your tax professional should be able to help you identify ways to increase the efficiency of your tax plan.
6. Are there strategies to optimize my gifts to charities?
Smart charitable giving strategies can maximize both your impact and tax savings.
Using a donor-advised fund (DAF) lets you take an immediate deduction while spreading donations over time. Bunching contributions into a single year can also increase deductions.
Qualified Charitable Distributions (QCDs) from IRAs allow tax-free donations for those 70½ or older, while donating appreciated stock helps avoid capital gains taxes.
Choosing the right strategy can enhance both your generosity and tax efficiency.
7. (If you own a business) What specific questions should I consider as a business owner?
Three specific questions that come to mind:
a) Am I maximizing my business deductions?
There are a multitude of deductions that you are entitled to as a business owner.
You’ll want to ensure that you are capturing all of your eligible business expenses, from home office costs to retirement plan contributions. Leveraging the 20% qualified business income (QBI) deduction, properly timing expenses, and structuring purchases for maximum write-offs can also reduce your tax burden. Your tax professional should be very helpful here!
b) Have I chosen the correct business entity type and tax classification?
Most people are sole proprietors and move to an LLC. What’s right for you?
Your business entity and tax classification play a crucial role in your tax liability and overall financial efficiency. The right choice—whether an LLC, S-Corp, or C-Corp—depends on factors like income, liability protection, and eligibility for key deductions, such as the 20% Qualified Business Income (QBI) deduction.
c) Do I have the right business retirement plan type and if not, should I change this or start one?
If you have a plan, when was the last time you took a look at it? What are the investment options available to participants? How much are you contributing?
If you don’t have a retirement plan in place then you should consider adding one. There are retirement plan startup credits that can make the plans very cost-effective to open for the first few years and they serve as a great retention tool if you have employees.
Have any questions about what you’ve read? Let’s talk about them!
Read My Other Work!
