Start Planning for Tax Season NOW
By: Alexander Roig, August 19, 2014
While tax season seems far away, the reality is that we are more than half-way through 2014, and we are having many tax-related discussions with clients. No one wants to pay any more taxes than they have to, so we help clients be as tax efficient as possible. As a client once told me, “While Uncle Sam might be a relative because he’s my uncle, I don’t like him that much, so I don’t want to give him a penny more than I have to”. So what tax items do you need to be reviewing between now and December? Take a look at the following list. It isn’t comprehensive, but it should provide a starting point for thinking along the lines of proper tax planning. As always, these are topics that you need to discuss with your financial planner and your accountant so that everyone is on the same page.
1. Retirement plan contributions Fall is a great time to review your employer retirement plan (401k, 403b, SIMPLE IRA, SEP IRA) to see how much you have contributed year to date. If you plan on making the maximum contribution for the year, your contribution should be at least 2/3 of the way complete. Keep in mind that most employer-sponsored retirement plans only allow contributions through payroll deduction, so you can’t write a check to fund that account at the end of the year. Click here for more contribution details. Also, if you are age 50 or over, you need to consider catch-up contributions as well. These allow persons over the age of 50 to contribute additional monies to their retirement account, which also means deferring more income from taxation. If you are self-employed, now is a good time to review your income for the year and determine how much you can afford to contribute to your retirement plan.
2. IRA contributions / Roth conversions In addition to your retirement plan through work, it’s important to review your eligibility to contribute to an IRA for the 2014 tax year. This IRA could be Traditional or Roth, depending on your particular tax needs and what you income allows. If you have been told that your income is too high for Roth contributions, speak to your advisors about non-deductible IRA contributions and Roth conversions. As you know, these contributions can be made up until the tax filing deadline in April of 2015, but it helps to get an idea of where you stand and what the plan will be before tax season is in full swing.
3. Medical Savings Accounts Review your medical situation for your family, and estimate how much money you have spent thus far in 2014 on medical expenses. Do you have a Flexible Spending Account (FSA) or Health Savings Account (HSA)? If so, are you using them to their fullest extent? You can check with your benefits person in HR to review your options. While some medical expenses can be unforeseen, many others are ones that can be planned for in advance. Whenever possible, use an FSA or HSA to pay for medical expenses. And if you have money in an FSA that you will lose by the end of the year, make sure to schedule that physical, eye-exam, or other medical test you have been putting off so that your money doesn’t go to waste.
4. Realizing Capital Gains / Losses The stock market has been on quite the run since its lows in March of 2009. If you have non-qualified accounts with large capital gains, review those gains with your advisors to see when it makes sense to harvest some of them. Obviously realizing the gains makes them taxable, but you might have losses that you could realize to offset those gains. Furthermore, if you regularly make charitable contributions to your church or other charity by writing a check, consider gifting them assets with gains of an equivalent amount. This allow you to pass on the gain to the charity, and they don’t have to pay taxes on it because they are tax exempt. Meanwhile, you can keep the money you would have donated to them and purchase another investment to grow your money further. There are even Donor-Advised funds that allow you to gift large capital gains and have the fund pay amounts to charities over a number of years, rather than in one lump sum, while still realizing the tax savings of the gift.
5. 2014 Income Levels Review the amount of income that you have had this year, and any changes from previous years. Have you had a change in pay? Have you inherited any money, or do you have any stock options from your employer that are eligible for sale? Or are you a small business owner who has sold a business and realized the gain? Our incomes aren’t stagnant from year to year, so you need to keep tabs on any material changes and inform your advisors of the change so that you can use the next few months to plan. It’s better to review now and be able to enact any financial planning changes rather than wait too late and wishing you had done it earlier.
6. Social Security Planning One area that is often neglected is planning for how and when you need to take your social security benefit. Most people assume that they retire and immediately start taking their social security benefit the next month. While this is logical to consider, you need to review your income tax situation as well as your options for deferring your benefit and letting it grow through other strategies. If you retire in October, November or December, you have likely had an entire year of income from your job before that. Many companies who are offering early severance packages also might throw in a lump sum payment to you. It might make sense to wait a few months and start your benefit in the new tax year to limit your taxable income.
As I mentioned at the outset, this list simply scratches the surface of the conversations that we will be having with you over the coming months during our quarterly meetings. Taxes are a reality of life, so we need to work with you to plan accordingly to allow you to keep your hard-earned income. Be sure to let us know any tax questions you may have. We look forward to helping you finish 2014 strong and lay the groundwork for a great 2015.