Tax time, Again!

CFG Planner Blog /

Posted by Gary Abely, CFP®, AIF®, CPA

I know, it seems like yesterday we were gathering our documents for our tax preparer for the 2015 tax year.  The 2016 tax filing season is upon us and I thought I would share 10 often over looked tax planning opportunities.

  1. TAX CREDITS

Up first is a list of credits that you may qualify for.  If in doubt, ask your preparer if you are eligible.  A credit is better than a deduction because it reduces taxes owed dollar for dollar.

  • Education: Coverdell Education Savings Account ($2,000 limit), Lifetime Learning Credit (20% of qualified expenses up to $10,000), American Opportunity tax credit (Maximum of $2,500), Education Loan Deduction and Higher education expense deduction.
  • Earned Income Tax Credit: Some disability retirement benefits qualify as earned income to claim the Earned Income Tax Credit.  Many veterans are surprised to learn they can often qualify for this credit while on VA Disability.
  • Health Coverage Tax Credit: This credit can help pay for nearly two-thirds of eligible individual’s health plan premiums.
  • Child Tax Credit: This credit is for people with a qualifying child and may be claimed in addition to the credit for child and dependent care expenses.
  • Child and Dependent Care Credit: This is for expenses paid for the care of children under age 13, or for a disabled spouse or dependent, to enable the taxpayer to work.
  • Retirement Savings Contribution Credit: It doesn’t get better than this credit.  Our government is essentially paying eligible individuals to save for their retirement.
  1. TAX SAVINGS

Second on the list of tax saving opportunities is contributing to retirement accounts and HSA bank accounts (Must be enrolled in a qualifying health plan) prior to tax filing deadline.  The 2016 tax filing deadline is Tuesday, April 18th.   If you are at your preparer’s office and have not already contributed the maximum allowed to your IRA, ask what the impact would be on your tax bill if you contributed say $1,000 or $2,000.

  1. SELL INVESTMENTS

Sell losing investments during the year while they are down.  You don’t need to wait till December each year to harvest tax losses as many people do.  The S&P 500 index has experienced an intra-year decline of 14% on average since 1980.  You can replace the investment you sell at a loss with a similar (but not identical) type and avoid the wash rule which delays the ability to deduct the loss incurred (explained below).

A wash sale occurs when you sell or otherwise dispose of stock or securities (including a contract or option to acquire or sell stock or securities) at a loss and, within 30 days before or after the sale or disposition, you:

  • Buy substantially identical stock or securities.
  • Acquire substantially identical stock or securities in a fully taxable trade.
  • Enter into a contract or option to acquire substantially identical stock or securities.
  • Acquire substantially identical stock or securities for your individual retirement arrangement (IRA) or Roth.
  1. LONG-TERM GAINS

Sell investments with long-term capital gain if you are in the 10 or 15% tax bracket.  The long-term capital gains tax is -0- for taxpayers in the two lowest tax brackets.   This sale establishes a new, higher tax basis in your investment which could lower taxes owed in the future if your income rises or tax laws change.

  1. INCREASE CONTRIBUTIONS

If you receive a raise this year and don’t need the extra income, consider increasing your contribution to your employer’s retirement plan.  This option will help save taxes currently and hopefully provide more income in your retirement years.

  1. IRA CONVERSION

If you are in a very low tax bracket in retirement and expect your tax bracket to be higher in the future (for example, you retired early and have deferred taking social security and withdrawals from retirement accounts), consider converting some of you IRA into a ROTH IRA.  You may find that you owe little or no taxes on the conversion.  Be certain to consult a tax adviser to determine if this strategy makes sense for you.

  1. SPOUSAL IRA

Fund an IRA for a nonworking spouse, just don’t call him or her nonworking.  Even the IRS recognizes that the spouse at home, while often not paid, works just the same and needs a retirement account.  In many cases, couples filing jointly can contribute $5500 ($6500 if age 50 or older) to a spousal IRA for the “nonworking” spouse.

  1. DONATION

If you are retired, over 70 1/2 years old, and can no longer itemize, consider making charitable contributions directly from your IRA to a qualified charity.  The donation will help satisfy your required minimum distribution and you will not have to pay taxes on the distribution up to $100,000 per year.

  1. FILING CLASS

Be certain your filing class optimizes your tax outcome.  Most newlyweds and widow or widowers should file a joint return, when eligible, rather than filing as single or married filing separate.  Many tax software packages allow you to calculate the taxes owed under different filing scenarios.

  1. STUDENT LOANS

Student loan interest is deductible up to $2,500 in interest paid in 2016.  Better yet, this deduction is above the line (you don’t need to itemize).  Your income as a single filer cannot exceed $80,000 and you cannot be claimed as a dependent on another’s tax return to qualify for this deduction.

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