Is It Your Favorite Time Of Year?

Once again it is everyone’s favorite time of year (TIC) and no I’m not referring to spring.

I’m talking about TAX time. April 15 will be here before you know it and in all my years of advising clients I am amazed that every year I have at least one client that has a nasty tax surprise (i.e. they owe Uncle Sam and the IRS a significant amount of money). Also just for clarification the only people who like tax time are the IRS, the Treasury, and CPAs. In other words the people all of us taxpayers pay.

So in preparation of tax season I want to give you 7 questions you should ask your CPA.

How will ______ (insert your major life changes here) affect my taxes?

Many clients don’t realize that certain life events can affect their tax situation. Things like kids going off to college or purchasing a second home may qualify you for new deductions or credits.

If you who got married, had a child, got divorced, or lost a spouse your filing status may change but so will your deductions.

Should I have my employer make adjustments to my withholdings?

If you have had children, got married, divorced, or can no longer claim adult children as dependents you should consider making changes to your W-4 forms.

Also, if you will receive a large tax refund or tax bill you may want to adjust your withholdings to smooth your cash flow.

Should I increase my retirement plan contributions?

Retirement plan contribution limits have been raised in 2015 to $18,000 for employer sponsored 401(k), 403(b) and most 457and thrift plans. Also the catch-up provision has increased to $6,000 for those clients over 50 years old. IRA contributions are still limited to $5,500 with a $1,000 catch up provision.

You should consult with your tax professional regarding making contributions to a traditional or Roth IRA in addition to contributions to your employer sponsored plans. Contributions to an IRA are allowed regardless of income level and are not limited by contributions to an employer sponsored plan though the deductibility of contributions may be affected.

How has the Affordable Care Act affected my taxes?

Last year several new taxes were introduced as a result of the ACA becoming law. Clients saw the effect of the 3.8% Medicare surtax on net investment income over $250,000 for those married filing jointly ($125,000 for single filers). This year clients will need to show proof of being insured for the entire year or they will need to pay a penalty.

For some folks ACA may be a net positive when it comes to taxes but you will have to discuss it with your tax professional.

Can you help me project my 2015 tax bill?

You should review your projected income, deductions, and planned asset sales and other financial events with your tax professional. They should be able to help you prepare a projection of your 2015 tax bill and help you strategize ways to reduce your tax bill.

If you are self-employed you should also ask if your quarterly payments will fall within the safe harbor to avoid paying penalties and interest for any additional tax you may owe in 2015.

How can I lower my tax bill?

Taxes are on the rise. I know that is not news to anyone. After you get your tax professional to project your 2015 tax liability you should ask if there is anything you can do throughout the year to reduce your tax burden. Your tax professional should be ensuring that you maximize your deductions, properly manage your retirement plan contributions, and take advantage of tax credits that are available to you.

Is there anything I should be reviewing with my financial advisor about my investments?

Various tax code changes, including the 3.8% Medicare surtax, changes to capital gains tax rates, and compressed tax brackets for trusts are making tax considerations an important part of making investment decisions. Tax time should be an opportunity to open the lines of communication between all of your professional advisors. It is important so that you can have an effective and tax efficient planning relationship for your investments and financial affairs.

Best wishes

Peter Huminski AWMA

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax professional.