Our tax returns tell a story.
A Tax Return is the Story of your recent Past; it is your 2015 financial story.
The story tells the reader lots of information about you:
- Marital Status (tax rate) Single; Head of Household; Married filing Separate; Married filing Joint; Widowed
- How you earn your money – employee, self-employed, real-estate investments/rents; royalties
- How you support yourself if you are not working – unemployment, retired, pension, social security, Required Minimum Distributions
- How you spent your money: mortgage interest; children; student loans; medical bills; charitable donations
- Did you have a good year with gambling winnings? Capital Gains?
- Did you have financially devastating year, as many unfortunately did this year, because of so many natural U.S. catastrophes in 2015?
Income Tax Planning is one of the best ways to build your financial wealth.
Yes, 2015 is over and there is limited opportunity to improve that tax bill. However, depending on your circumstances, there might still be a way to reduce the amount you pay.
- Contribute to your IRA before 4/18/16
- If you are married, can you start and fund a Spousal IRA?
- For 2015 and 2016, your total contributions to all of your traditional and Roth IRAs cannot be more than:
$5,500 ($6,500 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than this dollar limit
Your Traditional IRA contributions may be tax-deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.
Be Careful of Excess IRA Contributions:
If you exceed the 2015 IRA contribution limit, you may withdraw excess contributions from your account by the due date of your tax return (including extensions). Otherwise, you must pay a 6% tax each year on the excess amounts left in your account
Note that Employer contributions made under a SEP (Simplified Employee Pension) plan do not affect the amount you can contribute to an IRA on your own behalf. You can both receive employer contributions to a SEP-IRA and make regular, annual contributions to a traditional or Roth IRA.
Our Financial Life is not stagnant. Like the ocean or a river, it changes all the time – it is a continuous evolving, moving, financial puzzle. New life stages & events provide us an opportunity to make new financial decisions & implement a revised plan.
The key to changing your Tax Story requires you to take action, now, in the present, and in the future.
Here are some tips to help you strengthen your Financial Fitness in this New Year:
- If you are an employee, review your withholding allowance on Form W-4. Is it accurate for what you anticipate in 2016? If not adjust, as soon as possible. The earlier you do this during the year, the more accurate your withholding will be.
- If you are Self-Employed, even part-time, do you know if you are required to make estimated quarterly payments to the IRS? Avoid penalties & interest by ensuring that you make the required payments if they apply. Independent Contractors, Freelance workers, those that conduct Internet based sales (Etsy, eBay, Airbnb) and even Uber Drivers should review the information on the IRS website.
The IRS expects you to pay tax as the money is earned. If you operate on a calendar year, due dates are 4/15, 6/15, 9/15, and 1/15 for the previous year.
- If you have a High Deductible Health Insurance Plan, consider setting up a Health Savings Account (HSA). This is a tax- advantaged account to help pay for your medical expenses.
It is also an “Above the Line” deduction on your 1040 Individual tax return, which means you can use it to reduce your income, even if you do not itemize. Lower income, generally indicates, lower taxes.
- If you gamble, including playing the lottery, save all of your 2016 “expense” receipts. Why? If you win big, you can reduce the amount you won by the amount that you lost and only pay tax on the difference.
Gambling income includes but is not limited to winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of prizes, such as cars and trips.
To deduct your losses, you must be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses
- Defer at least some of your income through a 401K match or similar program to reduce your taxable income for the year & to build savings for the future.
- If you itemize or might be able to itemize, record all of the miles you drive, by category: Charity ($0.14); Medical/Moving ($0.19) and Business ($0.54).
It can all add up, faster than you might think and may also make the difference between claiming the standard deduction and being able to itemize. The more you can legally write off, the lower your tax bill.
You can keep a paper calendar in your car & record what, where, why, & how many miles for each trip or use a Smart Phone App to help you.
Whatever you do, ensure you keep good records. If you are audited & can’t prove the deduction, the deduction can be denied and you could owe a penalty and interest for the underpayment.
- If you have a business and operate on a cash basis, it is imperative that you keep great records for both cash coming in & cash going out. This recent article highlights the reason why you need to do this: http://smallbiztrends.com/2015/12/recent-irs-case-highlights-need-sophisticated-small-business-management.html
- Think like a Tax Professional: Know your “Income” Types & their Tax Rates:
- Ordinary Income is income earned from providing services or the sales of goods
- Capital gains are usually associated with the sale or exchange of property characterized as capital assets
- Short Term Capital Gains are taxed at your Ordinary Income tax rate (10 % to 39.6%)
- Long Term Capital-Gains tax rates vary by your income tax bracket and the type asset sold
- Generally, if you’re in the 10% or 15% tax bracket, you’ll pay 0% on those gains. Most other taxpayers pay 15%; however, the rate can also be 20, 25, or 28% for certain asset classes and/or income levels.
Tax Deferred Investment Income includes:
Withdrawals from Traditional IRAs and your 401K, which are, taxed as ordinary income (10% to 39.6%)
Tax Free Investment Income: Roth IRA
- Tax Free Income as long as the account has been open for at least 5 years
- Provides flexibility in the timing of future income – you decide
- Required Minimum Distributions do not apply to Roth accounts as are required by Traditional IRA plans
- Roth IRA distributions are not considered as income when determining how your Social Security payments are taxed. Qualified Roth distributions are not included in either net investment income or in the modified adjusted gross income calculation for assessing the 3.8% net investment income tax
- Manage your Tax Bracket:
- Try to keep your Ordinary Income in the lower tax brackets
- “Fill up” each bracket, where possible
- Be aware of tax consequences before making decisions that push you into the next highest rate bracket; i.e. can you defer a bonus or sale to new year if it means you will be taxed 10% less?
- If you itemize, group deductions where possible; i.e. elective medical or dental procedures; charitable contributions to reduce your taxable income – Plan
- Your income tax bill is perhaps the biggest bill you will pay over your lifetime. Learn, Plan, Act to reduce and keep more of your money in your pocket, not Theirs (The IRS).
Yes, to be in compliance, we need to file & pay. The IRS rules are there for us to use. It is our responsibility and our choice to use them or not. The IRS is not going to tell you, you could have paid less, if you had just (xxx). There are a lot of possible ways to “fill in the blank”. Each Tax Story is unique.
As a CPA – Tax Advisor, I love learning the rules and then sharing information to help other people reduce their tax bills. It is my way to help empower other people and hopefully, make a small difference in their quality of life. Nobody likes paying taxes; almost all of us like to save money.
Have fun leaning, planning, and saving.
Cheers to a happier, healthier, & wealthier 2016!
Thanks for reading,
Deborah Ann Fox, CPA is working to make a difference in peoples lives, hearts, and wallets by helping others protect their financial health and is available for side-by-side, remote, or mobile appointments. More information is available at http://www.debfoxfinancial.com. Questions or comments can be sent to firstname.lastname@example.org