Join Casey, Jarrod, and special guest Steve Levy, CPA & JD, in a candid discussion about the real consequences of tax surprises. From penalties and interest to strained finances, the team sheds light on how bad a tax surprise can be for individuals and businesses. Learn key strategies to stay proactive and informed when managing your tax obligations.
Announcer:
Hello, everyone. Welcome to The Millionaire Dentist Podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.
Casey Hiers:
Hello, and welcome to The Millionaire Dentist Podcast. This is Casey Hiers, in-studio with co-host Jarrod Bridgeman.
Jarrod Bridgeman:
Hey. That's me.
Casey Hiers:
And we have a special guest, a frequent flyer here on The Millionaire Dentist Podcast, Steve Levy-
Steve Levy:
Hello.
Casey Hiers:
... AKA Pipes.
Steve Levy:
Hello.
Casey Hiers:
What a voice. We're going to have him sing at the end. He's going to sing us out. But just as a reminder, Steve is a CPA, also has letters JD after his name. He's one of those attorneys. He's a good one, though. Wouldn't you say?
Steve Levy:
Yeah, I would say.
Casey Hiers:
That wasn't very strong.
Jarrod Bridgeman:
Oh, I thought I had to do it with JD Byrider.
Casey Hiers:
No.
Jarrod Bridgeman:
Okay. All right.
Casey Hiers:
That's from the advertisement.
Jarrod Bridgeman:
That's right. Shoot.
Casey Hiers:
We brought Steve in the day to talk about taxes, tax surprises, those nasty things that practice owners can get real frustrated about. And sometimes, they feel a little unsure as to why. And we're going to get into the why.
Steve Levy:
Absolutely.
Jarrod Bridgeman:
We are. But first, I wanted to ask, what the hell is a tax surprise?
Casey Hiers:
Well, it's as you think it might be.
Jarrod Bridgeman:
Because it happens every year, right? Taxes.
Steve Levy:
Taxes definitely happen every year. And it's usually when your CPA or whoever prepares your tax return. And all of a sudden, you get a big balance that you have to pay. Also, if you get a big refund, either way, is a surprise. We generally try to have the amounts within 10,000 or so. Surprises might still happen, but the surprise of a big refund isn't as welcome as you'd think, because that's money that the government is keeping, for the time being, interest-free.
Jarrod Bridgeman:
So this isn't like back when I was in college and was buying ramen because I was poor. Then. A tax surprise was nice to get a $300 bonus.
Steve Levy:
Sure, sure.
Jarrod Bridgeman:
You know what I mean?
Steve Levy:
Yeah.
Jarrod Bridgeman:
We're talking much, much larger than-
Steve Levy:
Yeah, we certainly are. Absolutely.
Casey Hiers:
Yeah, $10,000 or more, right? That's our definition. Either [crosstalk 00:02:21] a refund or an additional tax bill after you've paid some estimates, and it's over $10,000. To your point, the refund feels like a blessing. It feels like a warm blanket. Woo. I got this money. And then when you talk to practice owners and say, "That's an interest-free loan to Uncle Sam," they're like, "Oh yeah." It's like trickery for the mind.
Steve Levy:
Exactly. You-
Casey Hiers:
Because it seems like a good thing, but it's actually not. Monthly cash flow and what that can do for you is much more important, right?
Steve Levy:
Exactly. And it's really your money. You just haven't had a chance to access it until filing your tax return.
Jarrod Bridgeman:
So you've mentioned it's bad because, yeah, you're in an interest-free loan. Obviously, this is an obvious question, because I said obviously quite often here, why is it bad to owe a lot?
Steve Levy:
Well, that's just more money out of your pocket that you didn't expect. And you might not know where it's going to come from. You might even if you had your tax return extended, you might have some penalties assessed on that balance, too. So it's a shocker if you don't know that it's coming. And even if you do know it's coming, then it still might be a lot to shell out that you weren't planning for very well.
Jarrod Bridgeman:
What do you say usually causes these tax surprises?
Steve Levy:
It's all planning, really. And [crosstalk 00:03:42].
Casey Hiers:
Steve, you're too nice. It's lack of effort. Most CPAs out there have lack of effort. They have a safe harbor estimate.
Steve Levy:
Right.
Casey Hiers:
Practice owner patty Smith had 1.2 million in revenues last year. So guess what? This year, we're going to write you down for 1.2 million in revenue. We're not even going to really ask you, "Do you plan to grow? Are you going to bring on an associate? Are you going to do anything that might alter it?" Is that the catalyst of it?
Steve Levy:
Yeah. That's it. Usually, a typical CPA might based on the prior year, give you basically safe harbor estimates that get you out of underpayment penalty, which is basically paying your taxes a long time along the year. But that's not at all reflective of what your year might be. And really, estimates are what you need to pay for income through a certain date, and that's what it needs to be factored on.
Casey Hiers:
What's an example of that?
Steve Levy:
So let's say you have from January through March, you have a $100,000. And your April estimate should be based on your January through March activity, your net income there. So again, also with the June, that should be January through May, factoring in what you already paid in April. But your June payment should be January through May. And that's the way you can really appropriately pay in the taxes based on the income that you've received.
Steve Levy:
Now, there's also withholding that should be factored in on your compensation. If you're way under-withheld, let's say you've got 10% federal withholding and your rate is typically 30%, that's going to also lead to a surprise.
Jarrod Bridgeman:
Would you say that would be the difference between a proactive CPA versus a reactive?
Steve Levy:
Right. Typically, what we see out there for the churn and burn CPAs that are churning out tax returns is they'll just throw out the estimates, really not look at your activity until the next time for tax time. They're not really involved in the accounting and the planning throughout the year, which that's going to lead to surprises, lead to reactive activity with your client, which really isn't what any of them want. They really want a partner to help with finances, to help with taxes.
Casey Hiers:
Many of the principles for this topic comes back to the words you just used, Mr. Obvious. A lot of them are Mr. Obvious statements, right? We go around and present continuing education on this topic. And when you mention it, everybody nods their heads, "Yes. That makes sense." Except what happens, most people don't do it. They don't ask their team to do it. They don't execute it. And it really just comes down to lack of effort, lack of planning, and a CPA who has 15 dentists or specialists, is not dental specific.
Steve Levy:
Right.
Casey Hiers:
What we hear most of the time is they talk to their person maybe twice a year. Maybe there's some emails. They pay their quarterlies, and then they're going to get hit with something. They actually joke it's not a surprise. They know they're going to get something large, 20, 30 minimum thousand. They just don't know which way it's going to go.
Steve Levy:
Right.
Casey Hiers:
Or they say, "I never want another tax bill again at end of the year," and then they get the $50,000 refund because their CPA said, "Okay. I'll crank up those payments throughout the year." And so none of this is a big surprise.
Casey Hiers:
But I had a conversation earlier this week with a practice owner. And as we looked at their items, simply structuring their income a certain way to maximize retirement savings, getting into the weeds, and doing a little bit of work, and in a 12 month period, their tax liability would be reduced $10,700 simply from structuring things that they're already getting, receiving, and doing. No extra work in terms of producing dentistry, $10,700.
Casey Hiers:
We see that a lot. That's why we get passionate about taxes and tax surprises, because too many practice owners have a poor standard of care with their accounting and their CPA, but they're not sure what to do about it.
Steve Levy:
Mm-hmm (affirmative). That's exactly true.
Casey Hiers:
I'll get off my soapbox.
Jarrod Bridgeman:
Things have been different, as we all know, for the past several years. Has there been any outstanding things that have caused tax surprises within the recent memory?
Steve Levy:
Yeah. Certainly, one thing that really causes some surprises is a last-second tax change. For instance, late December of last year, there was an expectation that you wouldn't be able to deduct the expenses you used for the PPP loan. Well, it was a December decision, and a welcome one, that all of a sudden you can deduct the expenses that you used for PPP loan.
Steve Levy:
So let's say you got a PPP loan of $100,000. That's a significant expense that we were expecting to go a certain way, but it went a good way. But that will lead to the refund, the larger refund surprise. Not a terrible thing, but still a surprise nonetheless.
Jarrod Bridgeman:
So something unexpected popping up from the government.
Steve Levy:
Yeah. That's one example. Also, people receiving funds from the HHS, another welcome activity, but not necessarily planned for, and another December activity that leads to something not planned for in the prior months and potential increase in taxes. So with the past few years, there's been all that different type of unexpected happening, certainly shutdowns [crosstalk 00:09:13].
Casey Hiers:
Even more curveballs.
Steve Levy:
Yeah. Who knows what the coming year will be. But if there's not this craziness, it's a little easier to predict where the taxes are going to land.
Casey Hiers:
I have some pearls of wisdom for our listeners. Number one, if you want better tax management and you're a practice owner, call Four Quadrants Advisory.
Jarrod Bridgeman:
Hey. That's us.
Casey Hiers:
There you go. But if I get off that self-serving line of thinking, which we can't help, people, but if maybe your brother-in-law does your taxes, here's what you need to ask them to do. Look at the safe harbor estimate for last year, work together and collaborate for a forecast, with dialogue on what you think next year's going to be, and then monthly's great, but at minimum, quarterly, look, like you referenced, in live time, "What did we just do in these three months? And let's make adjustments."
Casey Hiers:
And when you use those three things, typically it's going to be better. To us, that's standard of care. That's not some new-age idea, but the majority of people aren't receiving that basic thing from their accountants. So that's one thing. If you have the courage to, make the request. If you're tired of seeing refunds or tax surprises, that is something you can email your team and potentially get some help. So there's some complimentary advice from The Millionaire Dentist Podcast.
Jarrod Bridgeman:
All right. So I know we've roughly mentioned it in an example, but is there ways to lower the chance of a tax surprise?
Steve Levy:
Planning, planning, planning. Certainly, look at your financial situation, how that income is going to flow. Look at what you've paid in so far and see where you might be. Now, really, it comes down to you have to plan for what your entire year is going to look like in, say, the first quarter or the second quarter because your estimate is going to be based on your entire year. So that's something that we do. We plan for what your entire year might be based on how it's been so far. And so that's what your ultimate tax liability is going to be.
Jarrod Bridgeman:
And then you adjust as you go?
Steve Levy:
Yeah, [crosstalk 00:11:30] because your first quarter isn't going to necessarily see ... Your estimate of the year during the first quarter might certainly change by the time you get to year-end. But by the January estimates, it should be pretty spot on as to what you might have to pay in.
Casey Hiers:
And for our listeners, it's incredible. Taxes are important and people think about it. But for a practice owner to achieve more and have success, really, really good tax management is a foundation of it, because what happens is you can produce more and collect more and have great income and do a lot of the right things. But then if your tax situation is piecemealed together or not expert, it's going to keep pulling you back, right?
Steve Levy:
Right.
Casey Hiers:
It's a basic foundation for the most successful. We have GPS that make upwards to a million dollars. Well, guess what? Their tax situation is pristine. There are no hiccups, right? To be a high achiever in anything, you can't have the little things get in your way. And taxes get in the way of practice owners so much. But yet what do they do? They repeating the same things over and over and over again because they're not really sure about taxes. They trust that their tax experts do know because in their world, they're the expert dentist. They're going to get in the mouth and do the right things for their patients, and they would think others around them are. Don't assume that they are.
Steve Levy:
Absolutely. And also, if you're making good money, you should expect to pay some taxes. That's just how it is, unfortunately.
Casey Hiers:
If you make a lot, you're going to have to pay taxes. There's no getting around it. That being said, most people have their taxes so poorly done or structured that they're paying tens of thousands of dollars that they wouldn't need to. We had somebody, literally, we just redid their taxes and there was $38,000 that they got from previous year because it wasn't done.
Steve Levy:
Right. Certainly. And we've also seen tax returns where it wasn't done right in the previous year and they had to owe $100,000. It goes either way.
Casey Hiers:
Whoops.
Steve Levy:
It just needs to be sharper. Yeah. There's a tax surprise for you.
Casey Hiers:
Mm-hmm (affirmative). Well, Steve, I want to thank you for coming in. Taxes, it's not going away. It's a topic that's very important here. It's important. It's a foundational topic that helps drive success. But unfortunately is the more and more folks we talk to and speak with, boy, the tax mishaps. It's like turnovers in basketball. You don't need them.
Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist Podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go over to FourQuadrantsAdvisory.com and see why year after year they retain over 95% of their clients. Thank you again for joining us, and we'll see you next time.
