We are in the heart of tax season, and many individuals are meeting with or have met with tax professionals. Below are tips to consider to make tax time as efficient as possible, though tax strategies consistent with goals and objectives should be a proactive year-round activity. Tax planning must take into account each taxpayer’s unique situation and goals. Please consult with a tax professional to devise a tax-saving plan that most effectively meets your needs and takes into account the latest tax rules.
Maximize Contributions to Retirement Accounts
Certain expenses—like qualified retirement contributions—allow you to legally reduce taxes because they can be deducted from your taxable income. If you reduce your taxable income, that reduces the amount of tax you have to pay. In addition, contributions help you stay on track to achieve your retirement goals. IRA maximum contributions did not change from 2015 to 2016; one can contribute $5,500 to an IRA, plus an extra $1,000 if you’re 50 or older (the deductibility of this is phased out if you’re covered by an employer retirement plan). HSA holders can contribute $3,350 for an individual and $6,750 for a family, with a $1,000 catch up if you are 55 or older. You have the ability to do this before April 15, 2017 for tac year 2016.
Use ISOs to Your Advantage
Many corporate executives have Incentive Stock Options (ISOs) that can subject them to the Alternative Minimum Tax (AMT), an alternative way of calculating taxes that certain filers must use. The AMT can end up taxing the ISO holder on the spread realized on exercise despite the usually positive treatment for these awards. ISOs, if they meet the requirements, allow holders not to pay tax until the shares are sold and then to pay capital gains tax on the difference between the grant price and the sale price.[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”] You pay the higher of your regular tax plus the AMT tax. With proper planning, you may be able to reap the advantage that ISOs offer over NQSOs. Furthermore, if you have both types of options, it may benefit you to also exercise some NQSOs to take yourself out of AMT in a year when you may be in AMT due to an ISO exercise.
Remember to Coordinate with Your Entire Financial Team
It can be difficult to coordinate financial, tax and estate planning strategies. It’s critical to have a well-integrated team of a financial advisor, estate planning attorney and tax professional to execute a family’s vision and goals. Especially during tax time, a financial advisor or advisory firm can lead the integrated relationship to aid in simplification and efficiency.
Be aware of the latest tax scams
Tax fraud has increased significantly in the past few years, and it is beneficial to be aware of the latest scams. Each year, the IRS issues a list of the top 12 tax-related scams it sees throughout the year, which can be read here. Taxpayers should be aware of ploys that steal their personal information, scam them out of money or talk them into engaging in questionable behavior with their taxes.
Disclaimer: Callan Capital does not provide individual tax or legal advice. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov.