These magic words help physicians avoid big tax surprises in April

QUESTION:

"I just got my tax bill and it was a whopper. My tax guy asked me to write a check for about $30,000, which was a total surprise and a shocker since he asked me to write another big check late last year. I had to scramble to come up with the cash, and I don't want this to happen ever again. What I don't get is how this could have happened. When I wrote that last check, he said I would be okay. Did he drop the ball, or what?"

ANSWER:

I get this question almost every tax season, usually from physicians in their first or second year of private practice. The largest surprise tax bill I have seen was $150,000! Ouch.

Like the prison warden in the 1967 film classic Cool Hand Luke once said, "What we've got here is a failure to communicate."

As a financial planner for physicians, I know what you want is to have all your taxes paid by year end—before you file your taxes—so you can know how much of the money in your checking account is yours to spend, share, and save.

What your tax preparer  THINKS you want is to avoid paying a penalty for underpayment, and to hang onto your erstwhile tax money for as long as you can.

So when you told your tax guru, "I want to make sure I'm on track with my taxes," what he or she heard was, "Keep me out of trouble with the feds," not "I don't want to owe in April."

There are two things you need to know about taxes and tax people, things they didn't teach you in med school:

  1. Most tax people are genetically pre-programmed to help you pay the least amount of tax possible, as late as possible. It's baked into them from the time they’re born into the tax practice.
  2. The Infernal Revenue Service wants you to pretty much pay-as-you-go, throughout the year, either by having money withheld from your paycheck, or by paying quarterly estimated taxes if you're self-employed.

When your tax guru did your planning, they probably helped you make a "protective" estimated tax payment equal to either 110% of last year's tax liability or at least 90% of whatever they thing you might owe for this year. This protects you from a penalty but it doesn't protect you from a surprise tax bill. (For more on this subject, consult IRS Publication 505.)

To avoid a big surprise this time next year, you need to say something different to your tax nerd when you chat with them in the second half of the year. Instead of saying, "help me plan my taxes," say this:

I want you to help me pay ALL of this year's tax liability before the end of this year. To the best of your ability, I want you to help me pay 100% of my taxes as I go. I understand that by doing this I will be making a small tax-free loan to the government... I don't care. I want to sleep well, knowing that I'm all paid up. I want to know that the money in my savings account is really, really mine, not the fed's. In fact, I would like to pay MORE than I will actually owe. Can you set me up so that I overpay my tax bill by about $1000 this year, so I get a refund next year?

Your tax person may give you a slight scowl (since this goes against their instinct) but that scowl will be far smaller than the grimace you wore this year when you paid your taxes. Don’t worry about it. This is your tax bill, and they work for you. Be polite but firm, and ask them to make it happen.

This way, you'll know how much money you have left in your accounts to spend, share or save. And you'll sleep soundly knowing the jack-booted thugs are not going to kick down your family's door on April 16.