A guide to tax projections: What are they? How are they done? And why do they matter so much?

‘Tis the season for all things tax. There is no time like the present to start to plan for next year! This fact of life won’t seem so daunting if you partner with our seasoned professionals at O’Donnell, Ficenec, Wills & Ferdig. We’ve helped organizations and individuals effortlessly navigate the season by not perceiving it as such -- a timeframe -- but rather as an ongoing, year-round process. Consistent efforts throughout the year avoid the mad rush, missed opportunities and mistakes associated with waiting for the deadline to come around. Additionally, depending on one’s specific circumstances and how far our clients are into the year (when they reach out to us), it may make sense to run projections more than once, as more concrete information is accrued.

Tax projections, defined

To get a grip on your tax situation, now and into the future, involves careful evaluation. And tax projections play a fundamental role in such examination. Like broad financial projections, a tax projection offers a peek into what one’s future looks like on this front based on well-informed assumptions. A “pro-forma” return is based on what we already know (derived from data for the year so far), as well as what we anticipate (forecasting that accounts for the balance of the year). While it is a good practice, regardless of external and personal changes, there may be some specific situations that serve as impetus to reach out to our friendly and skilled team to “run the projections.”


For instance, one of our valued clients may be considering boosting his or her contributions to a qualified charitable organization. Or, you may have had the good fortune of being on the receiving end of a boost to your non-salaried earnings. Generally, there may be myriad or complex changes to legislation that could affect the impact on what you owe the next time “tax time” rolls around and your personal circumstances in general. By seeing into the future via forecasting, our clients are equipped with the information that drives better decision-making.


Different potential strategies to minimize negative financial impacts can be identified and analyzed to reach the best conclusion for you and your household. Now, it’s not always about merely reducing the tax bill; there may be other implications that outweigh the tax bill. Depending on those effects, it could be a smart move to accept less savings if this option offers alternative, better benefits. Running the numbers or projections really is about arriving at a few “roads,” and then simulating those potential paths by identifying the advantages and disadvantages of each potential journey. Think of it as a “Choose Your Own Adventure” for successful grown-ups in sophisticated situations!


Getting from point “A” to point “B”


Arriving at financial projections starts with collecting information about income and deductions associated with one’s last return. This information is then adjusted to acknowledge what is known about the current year. Factors that represent changes which could trigger such adjustments include:

  • Differences in the taxpayers’ income

  • Specifically, business owners or execs who encounter lots of non-salaried compensation

  • Changes to marital status, or the birth or adoption of children

  • Life transitions, such as an impending retirement

  • Possible deductions one may be eligible for

  • Tax rates


It stands to reason that the more actual financial information we can harness to run your projections, the more accurate the forecasted figures will be! It will then serve as an effective barometer for your financial health. For this reason, we may “time” projections toward the later part of the year after more financial data has been accumulated.


Additionally, if you face unique financial challenges or complexities, we may suggest running those numbers a few times each year. When we run those numbers, we are accounting for various scenarios, our metaphorical path to get to point “B.” Such analyses, notably, pinpoints the combined cost of federal and state taxes from each additional dollar that is earned in income, as well as the combined savings in federal and state taxes associated with each dollar of deductions that one takes. As with bigger picture financial projections, these insights provide invaluable information on one’s status for prospective refunds or balances that may be outstanding. Also, we can’t overstate the role that tax projections play in one’s broader financial projections and wealth management.


Taking a deeper dive into the notion of “Why project?”

There is a big difference between desirable surprises and unwanted ones, We want you to be pleasantly surprised by a smaller tax bill, rather than to encounter a bigger-than-planned-for bill! If the bill is unexpectedly larger than one had banked on, that’s a problem. The key here is “unexpected.” You as a taxpayer haven’t had an opportunity to plan to set aside more money to fulfill your tax obligations. You end up short at the last possible minute. Projecting or forecasting for taxes curbs the unexpected and provides much-needed clarity. There is time on one’s side to plan for changes, such as greater tax liabilities. Alternately, more time may allow for us to explore at greater length potential ways to lower that bill.


Tax opportunities present another considerable advantage of running projections. Real savings is to be had by wrapping one’s arms around the marginal tax bracket that he or she is subject to, and if deductions will be itemized or if one is taking the standard deduction. What we uncover while calculating your estimated tax burden may result in specific strategies in your best interests; for instance, many donations may be consolidated into a Donor Advised Fund, or deductions may be bunched when one starts to take required minimum distributions.


Our savvy personal and business clients also appreciate that projections, by nature, look forward and upward – to the future. Tax returns that are already prepared and filed look back, and are regressive. Leveraging forward-looking information gives one’s household and business a leg up over the competition; you are in the “driver’s seat” to choose from the smartest of potential strategies to positively affect one’s tax situation. While economic and regulatory circumstances are always in a state of change, using forecasting allows for us to better see what’s ahead not just for later in the year and the following year.


With this process, you are armed with the effects of specific decision-making and their respective consequences. This is helpful information to have in the longer-term future, and as one is confronted by potentially similar changes or situations. You can benefit from precedent and experience, and never have to find yourself declaring, “Hindsight’s 20/20!” The very real scenario arises, too, in which saving a small amount of money this year may end up costing you more the next tax year(s)! You wouldn’t know of those costly implications if you did not employ foresight into your broader tax and wealth management strategies.


The ”intangibles”: Worth their weight in gold


Healthy and viable tax forecasting and like processes are built on a foundation of consistent communication. They are supported by the ongoing back-and-forth that fosters unhurried, stress-free, productive, accurate, efficient, and high-value tax planning and filing. As your partners in all things financial, we at OFWF are also able to keep tabs on both your current and evolving personal and professional matters. We are already up-to-date on tax law changes; however, remaining up-to-date on you requires the ability to respond to any communications from our team. That way, we are always one step ahead when it comes to pivoting or adapting with your best interests at heart. This gives you peace of mind that no stone is left unturned; myriad information and perspectives are leveraged to reach your financial personal and business goals. The days of dreading that ominous deadline in April are history.


It's too easy to put off planning for another day, especially as one “tax season” winds down and suddenly you have a seemingly limitless time horizon. However, the sooner that you contact us, the earlier you can secure the benefits and the more dramatic those tax, personal and strategic benefits can be.


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