Reduce tax liability- K1 Capital Gains

[MGC94]

Client owed $6,312. Paid in $5,799. Total tax liability was $12,111. 

Single. No Dependents. 

On the K1 it showed net short term capital gains of $2,869

and net long term capital gains of $24,751

SS $21,948 

W2 $46,870 

Gains $27,620 

Dividends and interest $1,402

= $97,840 

Is there anything that can be done to reduce taxes owed? She only paid in on her w2. Client does not want to owe again this year like last year. 

Thank you 

[ljr]

I don't even know where to start with this email. You should not have to ask this type of question - this is the questions that your clients ask you. My suggestion to you is to go work for someone who can mentor you and teach you. We can only help you so much. As for the answer to your questions:

1) have taxes withheld from social security

2) increase the withholding on her W-2

3) make estimated tax payments based off the dividends and capital gains.

4) proseries estimated tax worksheet will help you and tell you what the estimates should be based on the current year. 

Good Luck. 

[dkh]

Does the client normally have capital gains on their K1 ?    Will the transaction(s) that happened in 2022 that resulted in the capital gains happen again in 2023 ?

Is the W2 withholding enough to cover the tax on the SS income?   

[MGC94]

So, I did tell her to take out taxes from SS and increased WH on w2. 

She wants to know if there is something she can do with the K1 gains. I guess this was her first year with a gain like that.

Yes, I do know about estimated tax payments. 

Ps. I wish there was someone to mentor me. 

[MGC94]

in 2021 there was no gains on the K1. 

I do not think she really knows about the K1 at all. 

I did tell her to increase SS withholding and w2 withholding 

[dkh]

I do not think she really knows about the K1 at all. 

Hard to do tax planning if the client doesn't know what income to expect from their K1.

[sjrcpa]

Did she get distributions? For future reference, distributions will give her a clue that there will be taxable income.

[MGC94]

That was my point as well. Thank you

[MGC94]

I will ask her. I did he taxes back in April and I just got the email yesterday that that was the most she owed ever and I was just trying to see if there was something I was missing. I felt her taxes were black and white. 

[IRonMaN]

Client:  I don't want to end up owing taxes next year like I did this year.

Preparer:  Ok, let me run a tax projection for you.  What do you anticipate for income next year.

Client:  I dunno.

Preparer:  

[abctax55]

Sell the investment?  That'd prevent any future K-1's & income.😉

But I betcha this is a trust, and your client is clueless as to 'why' s/he gets a K-1 (and also why those mysterious distributions show up... see Susan's comment).

edit... altho, how does one get to the point of collecting SS and not being aware of a K-1/distributions???   I do have ONE client that is this clueless.

[qbteachmt]

"She wants to know if there is something she can do with the K1 gains."

You explain how she pays taxes because she benefits from the activity.

"I wish there was someone to mentor me."

You can research "Safe Harbor." A client like this likely should be using Safe Harbor for estimates.

And make sure to learn, and then explain, the difference between "owing taxes" and "owing a balance" because everything here shows you are not clearly defining the conditions and that will matter for your client.

[MGC94]

And make sure to learn, and then explain, the difference between "owing taxes" and "owing a balance" because everything here shows you are not clearly defining the conditions and that will matter for your client.

What do you mean by this

[qbteachmt]

"What do you mean by this"

Not needing to pay a large amount at the time of filing doesn't affect how much they owed in taxes. You are supposed to be able to explain that. Your title asked to "reduce tax liability" and that isn't your issue really, because you asked, "Client does not want to owe again this year like last year."

When your financial life results in, "I owe taxes" meaning, you have taxable income or gain, you are supposed to have prepaid some of it. That is why there is W2 withholding, Social Security withholding, required withholding on Trad IRA and retirement distributions, and that is why there is a provision for making estimate payments. These are not Taxes. They are Prepayments.

This is why uninformed people love getting a refund. They think they are getting a return of taxes. Most times (setting aside the topic of refundable credits), they are getting their own money returned to them, because they overpaid the prepayment.

The opposite is true. Paying or not paying a balance is not what they are paying in taxes; it's paying the rest of the taxes they owe. They already paid some, in most cases, so that payment is not, "I paid $X in taxes when I filed" as if that is the amount of taxes they owed. It's only the balance they owed. This is what you asked, how to not have to pay at the end.

When they ask you to help them not pay, we are not trying not to pay taxes (beyond the regulation's provisions); we are trying not to owe more at the time of filing.

By prepayment through withholding and/or estimates, they simply are paying their liability over time, instead of only at the point of filing the tax return. But, again, uninformed people do not see it that way.

If this was my client, I would ask them if they mind being responsible for scheduling or for paying manually, on a quarterly cycle, based on some planning we will do together. If they answer "let's do this," then we would look at known income streams, safe harbor, and discuss that any unexpected windfall or activity might require an additional amount be paid at the time it happens and we don't even need withholding. If they do not want to be actively involved, we set up withholding everywhere possible and/or can schedule some estimates and our target can be based on safe harbor, and that can be a bit of a yoyo, but that's what they want.