The holidays are behind us and many of us are getting ready for that much dreaded tax season. The whole ordeal can be pretty daunting. First we wait for our W2s and 1099s to come by mail. Then we figure out which documents never arrived and track those down manually. Next steps are to dig through our files and figure out what deductible expenses we incurred during the year (medical expenses, donations, etc.) and what supporting documents we have saved so we can deduct them if itemization is an option. Preparing your tax return can be a challenge you decide to take it on yourself (bless your soul if you do) or pay a professional to save you the headache. Finally, the end result can be a welcomed tax refund or a loathsome tax payment due. Although the government appears to spend our money wisely, the latter is never welcomed news.
Whichever category you find yourself falling into, one thing many people ask in the end is how they can save more on their taxes. Below are a few helpful tips. Some of these can be implemented this year and some will help in the tax-year to come.
- Itemized Deductions – It is much simpler to take the standard federal deduction over the itemized deduction, and if you have a very straight forward financial situation, this may also be your best option. However, if you have more complex finances, your expenses such as mortgage interest, education expenses, dependent care expense or medical expenses to name a few, could provide you tax savings if you itemize your deductions. Other deductible items include investment management fees paid to your Financial Advisor or tax preparation fees paid to your CPA. The list of itemized deductions is pretty long and it may pay off to ensure you’re deducting everything you can. Refer to the IRS website to see a full list of possible itemized deductions:
- Maximize Your Retirement Savings – Many of those currently working have the option of contributing to a work sponsored retirement plan such as a 401k, 403b, 457, Simple or SEP IRA. Your contributions to your own retirement accounts are also a direct dollar for dollar reduction in your taxable income for the year. This is a quick and relatively easy way of moving money from your taxable pocket to your tax-deferred pocket and the money is still 100% yours. In 2015, the maximum contribution limits for a 401k, 403b and 457 are $18,000, plus another $6,000 “catch up” contribution for those age 50+i. For a Simple Plan, the maximum contribution limits in 2015 are $12,500 plus another $3,000 “catch-up”ii. The maximum contribution limits are adjusted regularly for inflation so you should check annually for the new limit.
- Donor Advised Funds – Charitable giving strategies are also an excellent way to reduce your income tax, capital gains tax and estate tax liabilities. Despite many misconceptions, you do not need to be a millionaire to consider charitable strategies. A donor-advised fund is a tax-advantaged charitable giving vehicle that offers maximum flexibility to take tax deductions and recommend grants to charitable organizations. By definition, donor-advised funds are public charities under Section 501(c)(3) of the Internal Revenue Code, and contributions to such funds are tax deductible. Donor-advised funds are particularly family-friendly, as parents and children can consolidate their giving activities through a single fund account. In addition, children can be named as successors to a fund, ensuring the continuation of a family’s giving legacy. Another significant advantage of a donor-advised fund is its capacity to accept any one of a variety of assets as a charitable contribution. Checks/wire transfers, commercial paper, mutual fund shares, securities, bonds, and restricted stocks all are acceptable assetsiii. In addition, the account has the potential to grow over time, increasing the donor’s giving power. Your Certified Financial Planner ™ can help you evaluate if this approach is suitable for you.
- Plan Ahead – Many only examine their taxes after they are filed, but there are many things you can do ahead of time to minimize your taxes. Tell your Financial Advisor and CPA ahead of time what your goals are for the year to come and give them permission to communicate with each other during the year so they can work together as a team to accomplish your goals. For example, we had a client come to us who had realized losses of $90K from a prior investment venture. When she began working with us, she asked if we could help her offset gains in her account with losses she had incurred in prior years. Coordinating with her CPA, we were able to help her realize tax free gains in her accounts over a 3 year period.
We’ve found that the most successful people plan for success rather than stumble upon it. With good planning and preparation, you can probably save some of your hard-earned money. Set an appointment with your Certified Financial Planner™ and your CPA in May or June and ask them to work together as a team to help you in the year ahead.
iiiInvesting in mutual funds involves risk, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Investing in stocks involves risks, including loss of principal.