Sunday, June 30, 2013

Mid-Year Tax Planning Checklist

All too often, taxpayers wait until after the close of the tax year to worry about their taxes, missing opportunities that could reduce their tax liability or help them financially. Fall is the perfect time for tax planning. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and thus avoid unpleasant surprises after it is too late to address them.

Did you get married, divorced, or become widowed?
Did you change jobs or has your spouse started working?
Did you have a substantial increase or decrease in income?
Did you have a substantial gain from the sale of stocks or bonds?
Did you buy or sell a rental?
Did you start, acquire, or sell a business?
Did you buy or sell a home?
Did you retire this year?
Are you on track to withdraw the required amount from your IRA (age 70.5 or older)?
Did you refinance your home or take out a second home mortgage this year?
Were you the beneficiary of an inheritance this year?
Did you have a child? Time to start a tax-advantaged savings plan!
Are you taking advantage of tax-advantaged retirement savings?
Have you made any significant equipment purchases for your business?
Are your cash and non-cash charitable contributions adequately documented?
Are you keeping up with your estimated tax payments or do they need adjusting?
Are you aware of and prepared for the new 3.8% surtax on net investment income?
Did you make any unplanned withdrawals from an IRA or pension plan?
Have you stayed abreast of every new tax law change?

If you anticipate or have already encountered any of the above events, it may be appropriate to consult with this office, preferably before the event, and definitely before the end of the year.

Monday, June 24, 2013

Summer Jobs and Taxes: What Parents and Teens Need to Know


The lazy days of summer will soon be here but for many young adults, summertime means heading off to work for the first time. According to the U.S. Bureau of Labor Statistics, approximately 19.5 million individuals aged 16 to 24 were employed in July 2012. Working a summer gig is a great way for teens to learn about financial responsibility while earning some extra spending money. Parents need to understand the potential tax implications for themselves and for their kids who are joining the summer workforce.

Income Reporting and Withholdings
One of the first things that parents and teens need to be aware of is how summer job income will be reported. If your child is working as an employee of a business, they’ll typically be required to complete a W-4 as part of the hiring process. This form tells the employer how much money to take out for federal and state income taxes. Line 7 of the W-4 form allows employees to claim an exemption from federal income tax withholding if they don’t believe they’ll earn more than the standard deduction threshold. For the 2012 tax year, the standard deduction for single taxpayers is $5,950, which means a dependent child can earn that much without having to file a tax return. If you or your child isn’t sure how much cash their summer job will generate, they can claim zero exemptions to make sure they won’t owe Uncle Sam at tax time. If they earn more than the exemption limit, they’ll need to file a return but they’ll likely be refunded most of the taxes that were withheld.

Self-Employed and Independent Contractors
If your teen has an entrepreneurial spirit, they may want to start their own summer business. While you may not think money from mowing lawns or babysitting would be taxable, the IRS takes a different view. Teens who earn more than $400 from self-employment are required to file a tax return. They’ll also need to file Schedule C to report their income and claim any qualified business deductions, such as mileage or expenses for supplies and equipment.

In some cases, employers may decide to hire teens as independent contractors, which means for tax purposes they’ll effectively be considered self-employed. Independent contractors who earn more than $600 will receive a 1099 form, rather than a W-2. Whether your child is working for themselves or on a contract basis, you both need to be aware that no taxes will be withheld from their income. Depending on how much money they make they may not be owe any federal income tax but they may still have to pay self-employment tax. As of 2013, self-employment tax is calculated as 15.3 percent of net earnings, excluding any business-related expenses.

Claiming Working Dependents
Even if your teen works during the summer or at any other time during the year, you may still be able to claim them on your taxes as a dependent. According to IRS guidelines, a working child can still be claimed as a dependent, regardless of how much they earn, as long as they don’t provide more than half their own support. If your employed teen is under the age of 17 and meets the requirements for an eligible dependent, you can also claim the Child Tax Credit, which is worth up to $1,000 per child.

Special Situations
If you own your own business it may be to your advantage to hire your teen for the summer. According to the tax code, parents are not required to withhold FICA taxes from children in their employ as long as they’re under 18. If your child is under age 21, you also aren’t required to withhold federal unemployment tax. Just keep in mind that you’ll have to withhold income tax if they end up earning more than the filing threshold limit. If your child receives any form of investment income while working, they could end up being subject to the kiddie tax. For 2012, children under 18 were required to file a tax return if they had any unearned income in excess of $950.

Taking on a summer job can be a significant learning experience for teens and parents, especially when dealing with taxes. Knowing what to expect can help you both to be prepared once it’s time to file.

Saturday, June 15, 2013

Estimated Tax Payments Due Monday, June 17

The second installment of estimated tax payments for the year 2013 are due on Monday, June 17, 2013. The deadline for sending in estimated tax payments normally falls on June 15th. Because June 15th is a Saturday this year, the deadline is moved to the following Monday.

Estimated tax payments can be remitted online using the Electronic Federal Tax Payment System. Payments can also be mailed in using Form 1040-ES with a check. Checks should be made payable to the United States Treasury, and in the memo field indicate the Tax Year and Tax Form; for example, "Year 2013 Form 1040-ES." After this write your Social Security Number.

Friday, June 14, 2013

Mid-Year Tax Planning Tips to Do Now


While Tax Day 2014 may seem like a long way out, experts say that now is the time for consumers to get organized and be on track with new tax code regulations to avoid possibly missing out on exemptions, deductions and credits.
“A check-up can be a particularly wise move this year, given the rise in the markets since the start of 2013, and the changes that have taken effect with capital gains and other related taxes".
The major changes in the tax laws for 2013 means taxpayers, especially higher-income earners, may be in for a big surprise when it comes time to file their return in April if they’re not cognizant of the new regulations.
“Before, the highest tax bracket for individuals was 35% and it’s now 39.6%,” he explains. “The good news is this [only] affects single filers with a taxable income over $400,000 and joint filers with taxable income over $450,000.”
No matter their tax bracket, all filers should understand how tax exemptions, deductions and credits can reduce the amount of taxes owed, and avoid making a mistake or potentially getting audited.
“A common mistake is putting certain expenses on the wrong schedule and making an otherwise deductible expense become not deductible,” says Mike Piershale, president of Piershale Financial Group. “Recognize that if you're not experienced at preparing a tax return, get professional help from either a CPA or a qualified tax preparer.”

Tip 1: File for Exemptions Correctly
Taxpayers should strive to take full advantage of every eligible exemption. For instance, a married couple filing jointly would have an exemption for each spouse as well as one for each dependent.
W-2 employees should pay close attention to ensure they have the right exemptions in place. Having too much money withheld can be a misstep, preventing them from maintaining cash flow and investing it wisely to grow over time or to ward off debt, warns Carriero.
“On the other hand, having too little withheld may cause a person to have to write a check to the IRS at the end of the year,” he says.
Although declaring personal exemptions is usually fairly straightforward, DeFranco warns that it can get complex due to the change in tax law.
“If a person is not subject to alternative minimum tax, the new law for 2013 phases out personal exemptions,” he says. “Depending on a person’s income, for each $2,500 over a threshold--for joint filers that’s $300,000 and for single filers that’s $250,000--your personal exemptions are reduced by 2%.”

Tip 2: Keep Track of Deductions
Deductions reduce taxable income and the value of those deductions are based on one’s marginal tax bracket, so it’s important to make sure they are being claimed on the right form and for the accurate amount.
Taking deductions on mortgage interest and contributions to a 401(k) or other retirement vehicles will reduce adjusted gross income, says Michael Eisenberg, of Einsenberg Financial Advisors and spokesperson for the California Society of CPAs
“You will then be able to maybe avoid going over the threshold that will throw you either into a higher tax bracket or subjects your income to the surcharge for the Affordable Health Care bill,” he says.
Keeping accurate records for deductions such as charitable donations or medical expenses is essential, says Greg Stevens, CFP, Cabot Money Management.
“If you do have medical expenses, they are only deductible in excess of 7.5% of your [adjusted gross income] and keeping receipts for medical expenses is a big one, especially for older tax payers with a high level of medical care, in a nursing home or have home help aids come to them.”
To determine the best filing status, DeFranco recommends taxpayers add up all itemized deductions and compare it to the standard deduction to see which number is larger.
“The standard deduction is $12,200 for married couples and $6,100 for individuals and most people if they own a house are going to be better off with the itemized deductions because of the mortgage interest deduction and real estate tax deduction,” he says.

Tip 3: Take Advantage of All Applicable Credits
Tax credits are extremely valuable to reduce tax liability dollar for dollar and with several common credits, there are many opportunities to reduce tax burden.
“The child tax credit may apply if you have a qualifying child under age 17, [which] may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return,” Piershale says. “In 2013, the American Opportunity tax credit would give a $2,500 credit for undergraduate education for an eligible student [and] is calculated per student, not per tax return.”
Because there are so many credits available and the tax rules around them can be complex, Einsenberg recommends doing ample research and working with a qualified tax professional before claiming any credits.
“In order to take the best position for your own tax scenario, you should understand what they are and how they work,” he says. “If you think you are going to have utilization of these credits, it might be advisable to seek out a CPA to help you figure these things out because they are complicated.”

Monday, June 10, 2013

Midyear Tax Moves to Save on Your 2013 Return


Smart planning now could save you big bucks when you file next year.

Shelving your taxes until next spring could cost you money, especially this year. The tax law passed earlier in the year as part of the deal to avert the fiscal cliff imposes a new 39.6% marginal rate on taxable income over $400,000 ($450,000 for married couples). Taxpayers in this bracket will pay 23.8% on dividends and long-term capital gains — not the 15% rate that applies to most investors.

Other changes reach down the income chain. Taxpayers with adjusted gross income of $250,000 or more ($300,000 for married couples) will effectively pay higher marginal rates because Congress resurrected phaseouts of itemized deductions and personal exemptions. And taxpayers with modified adjusted gross income of $200,000 or more ($250,000 for married couples) face a new 3.8% surtax on net investment income.

That tax could hit people like Mike and LaVerna Leach of Virginia Beach, Va. Mike is a retired Marine helicopter pilot who receives about half of his retirement income from his investment portfolio; LaVerna is a watercolor artist who owns her own business. Mike says they sold some property last year to beat the tax increase and will probably check in with their tax adviser, before year-end to see whether they need to do anything else.
There are ways to mitigate these tax hikes, especially if you act now.

Make your investment portfolio more tax-efficient. Mike says he doesn’t expect to make major changes to his portfolio because he doesn’t want to “let the tax tail wag the investment dog.” That’s good advice. But it’s important to pay close attention to the types of investments in taxable accounts and the types in tax-deferred accounts, such as your 401(k) plan. Savvy investors often keep investments that generate a lot of taxes, such as taxable bonds, real estate investment trusts and high-turnover mutual funds, in their tax-deferred accounts; they keep index funds and other tax-efficient investments in their taxable accounts. Higher tax rates make that even more important.
If you need income from your taxable account, consider municipal bonds, suggests Greg Womack, a certified financial planner with Womack Investment Advisers, in Edmond, Okla. Interest on muni bonds is exempt from federal taxes and, in most cases, from income taxes of the state in which the bonds were issued. In addition, munis are exempt from the 3.8% investment surtax, which makes them even more attractive, Womack says. Keep in mind, though, that in­terest from some types of muni bonds is subject to the alternative minimum tax.
It is also a good time to review your portfolio for potential losses you could use to offset capital gains. If you were planning to sell appreciated investments this year, ditching some of your losers will help you lower or eliminate taxes on the gains.
Take advantage of tax-deferred accounts. The new tax rates and phaseouts are tied either to adjusted gross income or to taxable income. (AGI is the amount before subtracting the value of exemptions and deductions; taxable income is the amount that’s actually taxed.) So it’s more important than ever to look for ways to hold down both figures. One of the most effective strategies is to max out your contributions to tax-deferred retirement plans.
In 2013, employees younger than age 50 may contribute up to $17,500 to a 401(k) plan; workers 50 and older may contribute an additional $5,500.
Contributing to a health savings account will reduce both AGI and taxable income; the money grows tax-deferred, and it can be withdrawn tax-free for qualified medical expenses. To be eligible for an HSA, you must be covered by a high-deductible health insurance policy, either through your employer or on your own. In 2013, a high-deductible plan is one with a deductible of at least $1,250 for individual coverage or $2,500 for a family.
You may contribute $3,250 to an HSA this year for individual coverage or $6,450 for a family; if you’re 55 or older, you can kick in an additional $1,000. That’s considerably more than the $2,500 maximum you can put in a medical flexible spending account, another tax-favored way to pay health care expenses. And unlike flex plans, which come with a use-it-or-lose-it proviso, HSAs let you roll over unused funds for future years.

Give appreciated assets to your adult children. Are your kids struggling to pay off student loans? If you’re willing and able to help, give them appreciated stocks or mutual funds instead of cash. When they sell, they may pay lower taxes on the gain than you would owe. The long-term capital gains rate for taxpayers in the 10% or 15% tax bracket (with taxable income up to $36,250 for singles or $72,500 for married couples) is 0%.
Giving appreciated securities to family members “is a way to diversify across tax brackets,” says Greg Rosica, a tax partner with Ernst & Young. You can give securities valued at $14,000 per person in 2013 without filing a gift tax return; if you’re married, you and your spouse can give $28,000 to any number of people.

To qualify for the special rate for long-term gains, the securities must have been held for more than 12 months. For gift securities, however, the holding period includes the time that you owned the assets, so your children don’t have to wait a year to sell their stocks or funds, Rosica says. But if your children are younger than age 19 or full-time students younger than age 24, note that they will be subject to the “kiddie tax,” which means investment income exceeding $2,000 will be taxed at your tax rate.

Give appreciated securities to charity. Donating appreciated stocks or mutual funds to charity has always been a smart strategy for high-income taxpayers, and it makes even more sense now. By giving appreciated assets, you avoid taxes on the gains and still get to deduct the full value of the securities. Now that the top long-term capital gains rate is 23.8%, “pushing the gain off to charity is even more important,” says Tim Steffen, director of financial planning for Robert W. Baird. The charity doesn’t have to pay taxes on the profits when it sells the securities.
Donor-advised funds are another avenue: You get the write-off in the year you donate, but you can decide later which charities will benefit from your philanthropy.

Make charitable gifts from your IRA. Congress extended through 2013 a provision that allows seniors age 70½ and older to transfer up to $100,000 from traditional IRAs directly to charity. Such contributions can count toward required minimum distributions for the year.
Your contribution won’t be deductible, but it will lower your AGI. As in the past, that could qualify you for tax breaks and reduce or even eliminate taxes on Social Security benefits; now, it could also help you avoid new tax hits, such as the phaseout of other deductions, Rosica says.

Check your withholding. Starting this year, taxpayers will owe an additional 0.9% Medicare tax on earned income of more than $200,000 for single filers or $250,000 for married couples who file jointly. For example, if you’re single and earn $225,000 this year, your employer will be required to withhold 1.45% on the first $200,000 and 2.35% on the next $25,000.
Suppose, though, that you’re married and you each earn $150,000. Your employers won’t withhold the extra 0.9% payroll tax because your individual earnings are under the threshold. But you’ll still owe the additional levy on $50,000 of your joint income, notes Heidi Tribunella, associate professor of accounting at the Simon School of Business at the University of Rochester.
That alone won’t trigger an underpayment penalty. But you could run into problems if you also have investment income that’s subject to the 3.8% surtax, says Stephen DeFilippis, an enrolled agent in Wheaton, Ill. To avoid penalties, you may need to adjust your withholding. If you’re self-employed, you may need to adjust your quarterly estimated tax payments to cover the new tax.

Plan ahead for medical deductions. Deducting medical expenses will be more difficult this year. To qualify for a write-off, your unreimbursed medical expenses must exceed 10% of your adjusted gross income, up from 7.5% in the past. For taxpayers 65 and older, the threshold remains at 7.5% through 2016. And remember, you can deduct only expenses that exceed the 7.5% or 10% threshold.
The change will put the deduction out of reach for even more taxpayers. But you may have a better shot if you schedule elective procedures, such as braces for the kids, in the same year that you have other high medical costs, Tribunella says. Some married couples can boost their chances of claiming the deduction by filing separate tax returns, particularly if one spouse has a lower income and high medical expenses. Be aware, though, that you give up other money-saving tax breaks when you file separately.
Make sure you keep track of all qualifying expenses. In addition to items such as hearing aids and eyeglasses, you can deduct a portion of premiums for long-term-care insurance. Also deductible: travel costs for medical services.

Reconsider the home-office deduction. New IRS rules make it easier for self-employed taxpayers to deduct the cost of their home offices. In the past, claiming this money-saving tax break required filling out a 43-line tax form itemizing expenses, such as the percentage of utilities consumed by the home office. The hassle, plus the fact that this write-off was widely viewed as an invitation to an IRS audit, apparently persuaded some self-employed workers to skip a break they deserved.
The streamlined rule allows you to deduct $5 per square foot, up to a maximum of 300 square feet, or $1,500. The requirements for deducting a home office haven’t changed: It must be used regularly and exclusively for your business. And you should still keep a record of the costs of your home office because, in some instances, the itemizing method could deliver a bigger tax break.

Finally, as you plan your tax strategies for 2013, keep an eye on Washington. President Obama has proposed capping itemized deductions at their value for taxpayers in the 28% bracket. That means the tax-saving power of itemized deductions would be reduced for taxpayers in the 33%, 35% and 39.6% brackets. The President’s 2014 budget also proposed capping the amount that taxpayers can contribute to tax-favored retirement savings accounts when they reach $3.4 million .

Neither plan will be enacted this year. But as lawmakers continue to look for ways to lower the deficit, proposals to limit deductions “have got a lot of people concerned,” says Steffen, of Robert W. Baird. If it appears that Congress will cap deductions next year, he says, high-income taxpayers may want to consider accelerating some of their deductible expenses, such as charitable contributions, so that they occur in 2013.

Thursday, June 6, 2013

How to Make Form W4 a Tax Planning Tool

With the economic recovery on a steady path, many taxpayers are looking back at the Great Recession and its impact on incomes, housing and retirement plans and wondering exactly how best to complete Form W4 – Employee’s Withholding Allowance Certificate.
Form W4 is a good tax planning tool. By dictating how many exemptions to claim, you control the size of your paycheck and the amount of money from each check that will be paid to the IRS and to your state’s taxing agency, if you live in a state that levies income tax.

 If you claim too many exemptions, your check will be higher but you may find yourself owing a large tax liability at year end. Over the years I’ve had the misfortune of helping folks who didn’t claim properly and found themselves in trouble. It can be devastating, credit-ruining, and very expensive to crawl out from under.

On the other hand, if you claim too few exemptions, your check will be smaller and you may receive a substantial refund from the IRS. But here’s the thing with those large refunds: conventional wisdom states that you are giving an interest-free loan to the government for the year. Some folks don’t really care about that and consider it forced savings account that can be used to purchase a new gadget or take a vacation when the refund check arrives. Besides, it’s not like the banks are paying competitive rates on savings these days.

There is also the possibility of claiming “exempt” on line 7 of the form, which works if you will have no filing requirement. This applies to students, part timers making very small incomes, some retired individuals making very little money and with no other sources of income. But naturally, it’s complicated. So check the IRS Filing Requirements to find out where you stand.
Otherwise, to determine how many exemptions you should take, complete the worksheet on page 1 of Form W4. Claiming exemptions for filing status of Head of Household and for number of dependents is a great start to deciding how many exemptions will work for you.
However, there are other factors to consider. Let’s say you are single with three children and can claim the Head of Household status. According to the worksheet, you will be able to claim five exemptions. This may work out as a break even for you next April 15. However, there may be other factors to consider. Perhaps you are also running an online business on the side making a few grand extra every month. That money will be taxable and if you are not making estimated tax payments to cover these extra taxes then you should adjust your withholdings from five perhaps down to zero. Then again, what if you are using the extra monies from your self-employment to pay for your health insurance or fund your IRA account? If so, those are deductions that will substantially reduce your tax liability. My best advice is that if you are also self-employed speak with a tax professional to help you determine the correct number of exemptions to claim.
Page 2 of Form W4 takes into consideration the lowering of your tax bill via your ability to claim itemized deductions and other adjustments to income. It also includes a worksheet for families that have two earners or if you have more than one job.

You might want to pull out a copy of your prior year tax return in order to complete these sections.
Tax law is a very complex subject and can be tricky for even a professional tax person much less the average taxpayer. If you get confused with all the worksheets and caveats and exceptions and rulings, then I suggest you ask a tax professional to help you complete the worksheet and determine the safest approach to withholding for you.

Wednesday, June 5, 2013

9 Ways To Avoid The 401(k), IRA Early Withdrawal Penalty


Withdrawing retirement funds early is usually a really bad idea, but sometimes it can't be avoided. Here's how you can minimize the damage.

When you're faced with serious money sucks -- say, unemployment, a new home or the prospect of funding your child's college education -- it can be tempting to dip into your retirement nest egg.

If you're still some years away from retirement, you may think, I have plenty of time to replace this cash … and it's just sitting there.

But before you start treating your retirement savings like a rainy day fund, think about whether the short-term payoff is really worth the cost.

Withdrawing early from that tantalizing nest egg can lead to a bevy of unexpected taxes. The government has stiff penalties for early withdrawals from most retirement plans in order to ensure that your retirement funds are used for intended purposes.

So be sure to brush up on the rules for IRAs, Roth IRAs, 401(k)s and 403(b)s if you're thinking about cashing out before that egg has hatched. In the meantime, here's the gist of what you'll face if you do choose to withdraw early:

Penalties For Early Withdrawals

Across the board, these four retirement plans follow the same general guideline: Withdrawals from IRAs, Roth IRAs, 401(k)s and 403(b)s are considered "early distributions" before you reach 59 1/2 years old. There are exceptions to this rule, but assuming that you aren't disabled or saddled with large medical expenses, early withdrawals are hit with a 10% penalty by the federal government, and possibly another 10% withdrawal tax depending on the state and the applicable income taxes on the distribution itself.

"Those who withdraw early may end up losing 40-50% of their money between taxes and penalties," says Stephany Kirkpatrick, director of financial planning at LearnVest Planning Services.

If you want to avoid this loss, and you foresee such shorter-term expenses as a home purchase or a potential job loss, she recommends putting money into a savings account or a CD rather than investing it. "Then there aren't market risks, taxes or penalties," Kirkpatrick says.

Exceptions For Early Withdrawal Penalties

You may be able to dodge the early withdrawal penalty -- even if you're not yet 59 1/2 -- if you meet certain exceptions. In all of these cases, the distributions will still be taxed as income, unless you have a Roth IRA, which is already comprised of post-tax contributions.

Here are some of the most common exceptions that allow you to withdraw money without getting hit with the 10% penalty:

You are disabled.
You inherited this retirement account from a deceased person.
You have unreimbursed medical expenses that make up 7.5% or more of your adjusted gross income.
You're using your distribution to pay medical insurance premiums while unemployed.
You, your spouse or dependents have qualified higher education expenses, such as tuition, school fees and books. If the student is enrolled at least part time, distributions can also be used to pay for room and board.
Your distribution is used to pay an I.R.S. levy, which allows the government to seize and sell your property to satisfy existing tax debt.
You are in the military and have been called to active duty for more than 179 days or an indefinite period. In this instance, the distribution is considered a qualified reservist distribution.
You're a first-time homebuyer. If so, the distribution can be used to buy, build or rebuild a first home; the amount is limited to $10,000 per person. Together, qualifying couples can withdraw $20,000 for a first home and avoid the 10% penalty.

There is one other, less common exception: substantially equal periodic payments. Partaking in an SEPP program allows you to withdraw from an IRA before you reach 59 1/2, if you follow a specific distribution schedule that's determined on your life expectancy. Starting a SEPP program is a complicated choice, with a lot of potentially negative effects, so you must check with a financial adviser before signing up.

Other Early Withdrawal Implications

Even if you qualify for an exception that gets you out of the high tax burden, digging into a nest egg can come with unseen implications, Kirkpatrick warns.

"First of all, you are unwinding the foundation that you built for your retirement savings," she says. The compounded potential gains over a lifetime can be very significant, even for small distributions. This is even more so the case with Roth IRAs, since you've already paid taxes on the contributions.

And since early withdrawals are taxed as income, you could receive a heftier tax bill than you'd normally expect in April. "Depending on how sizable the new income is, it can throw you into a new tax bracket and change your overall tax liability, which you more than likely won't be anticipating," Kirkpatrick says.

Yes, the government penalties for early withdrawals are harsh. And, yes, it would be a shame to lose as much as half of your withdrawals to fees and taxes. But it's important to understand the motivation behind the government's actions: encourage planning for the future.

"Retirement plans were not designed to be ATMs, which is why there are fees in the first place," Kirkpatrick says. So unless you're in a seriously bad way, focus your efforts on saving up in an emergency fund that you can fall back on instead. This way, you can avoid touching that nest egg and concentrate on the long-term goal: living on a tropical island in retirement, drinking from coconuts the size of your head. It'll be well worth it.

Tuesday, June 4, 2013

Avoid surprises and plan tax strategies ahead of time


Most taxpayers think about taxes once a year, when they are due. However, it is usually too late to change things at this time. In most cases, tax preparers are merely reporting a taxpayer’s information when filing a tax return. This is after the fact information. Taxpayers can plan throughout the year to lower their tax bill by looking at a few areas.

How many exemptions are designated on the W4 if employed? If both spouses are working, have adjustments been made to ensure the taxpayer is having enough withheld? Having too many exemptions will drastically affect how much taxes are withheld. This is the most common problem I see when completing a tax return that results in owing taxes. The state of Utah has a 5 percent flat tax. When looking at how much is taken out of all income for state taxes it is easy to see if the year-to-date is falling in line with the 5 percent tax. Federal withholdings can be adjusted by completing the W4 correctly.

Is the taxpayer maximizing the employer’s 401k or retirement plan? Contributing to a retirement plan not only keeps the taxable income lower, but keeps the income in the taxpayer’s hands.

There are many ways to contribute to retirement plans that lower taxable income. Examining where your contributions go with a professional financial advisor can shift taxable income to nontaxable income. Most retirees don’t review their retirement plans once the election to retire is made. This can cause other income such as social security to be taxed. It is never too late to get the most benefit out of a retirement plan.

If you owed taxes this year when you filed your 2012 return, it is important to start making changes now midway through the year. Waiting until you file next year’s taxes will usually result in paying taxes again, which could result in a penalty for underpayment of taxes.

Keep more of your hard earned money in your hands by planning early. Tax planning not only involves a tax professional, but when paired with a professional financial advisor, your taxable income can be lower and save thousands in taxes.