We are in the heart of tax season, and most likely you are meeting with or have met with your tax professional. For many, meetings to prepare a tax return are like trips to the dentist— you want to get in and out as quickly and painlessly as possible.
Thus, here are some items from our perspective that you should be considering and questions you should be asking your tax professional to make tax time as efficient as possible.
1. Will major life events and changes in my personal life affect my taxes?
You may not realize that certain life events and milestones can affect your tax situation; you should make your tax professionals aware of any life events or changes to your tax situation. If any of your children enrolled in college in 2014, you may qualify for up to $4,000 in deductions for education costs, the American Opportunity Tax Credit, or the Lifetime Learning Credit. If you purchased a second home, you may qualify for a second set of home deductions for real estate taxes and mortgage interest. For those who got married, had a child, got divorced, or lost a loved one, your deductions may change. If you have gotten married or divorced, had children, or can no longer claim adult children as dependents, you should consider making changes on your W-4 forms to adjust exemptions. In addition, those who are receiving large tax refunds or have a large tax bill may want to adjust withholdings in an effort to smooth cash flow.
2. Should I increase my retirement plan contributions?
Retirement plan contribution limits have been raised in 2015. Contributions to retirement plans and IRAs accomplish two things – first, they may reduce your taxable income, thereby lessening your tax burden, and second, they help fund retirement and stay on track to meet financial goals.
If you are changing jobs in 2015, you should also coordinate with your new company’s human resources department to ensure that you do not exceed the maximum contribution to their 401(k) during the year due to making 401(k) contributions from both jobs. Consider consulting your tax professional regarding contributions to a traditional or Roth IRA in addition to contributions to employer-sponsored plans.
3. Should I consider a Roth IRA conversion?
As we mentioned in a prior Callan Capital communication, a partial or full Roth conversion may make sense, but know the facts first. Roth IRAs allow for tax-free withdrawals of qualified distributions, however when you complete a Roth conversion, you pay federal income taxes on the amount converted. Additionally, you can also change your mind and reverse the process through “re-characterization”, which may make sense if the value of the account has dropped, in accordance with Internal Revenue Code §408A.
Roth conversions should be considered for individuals who expect to be at the same or higher tax bracket after age 60 when distributions from tax deferred accounts can be made. Typically, individuals with substantial tax deferred assets such as IRA’s or 401k’s or substantial passive income will likely remain in high brackets as distributions are made. In these situations, Roth conversions can be beneficial since a Roth IRA also has no RMD (required minimum distribution) requirement like a traditional IRA, so it could potentially be a beneficial way to pass down assets to heirs.
Ask your tax professional to prepare a projection of the tax liability of a partial (or total) Roth IRA conversion. Roth conversions have tax, investing, and retirement considerations, and the decision whether or not to convert should be made after a discussion with your tax professional and your advisor.
4. Are there things to review with my financial advisor about my investments?
Certain tax code changes, changes to capital gains tax rates, and compressed tax brackets for trusts are making tax considerations an increasingly important part of investment decisions.
For example, Callan Capital likes to perform tax-loss harvesting several times throughout the year. Tax time should be an opportunity to open the lines of communication between tax professionals, financial advisors, and clients to conduct effective and tax-efficient planning for clients’ investments and financial affairs.
Disclaimer: Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov.