It’s Tax Time Again!

Here it is, tax time again!

Figure Income TaxWere you able to save much on your taxes this year?  Or, did you fall into one of the many tax brackets where it seems you just can’t get a break?  Regardless of where your income falls on the scale, there are some things that you can do right now that will potentially reduce your tax bill.  While many of these things fall into the tax return you’ll eventually file next spring, there are a couple of things you can do to make sure this year’s return is at least as accurate as it should be.

  • If you’ve not already done so, consider having a tax professional do your taxes.  Granted, there are lots of free or nearly free options online, but the laws change so much during any given year that you should definitely consider having a reputable firm do your taxes for you.  Especially if you make a lot of money, have lots of deductions, or have made a major life change in the past year, the difference between doing them yourself and having another do them could mean a substantial amount of money.
  • Make sure you’re filing under the correct status.  Even though you might think this is pretty straightforward, there are actually three options for singles and two for married couples.  Single, but have a child?  Single is probably not the right status for you.   Perhaps your spouse passed away, but you have a child?  There’s a couple of different status options for you, too.  Even Married is not necessarily as simple as it sounds.  Did you know that you might be able to save money if you and your spouse file separately instead of jointly?  Depending on your situation, choosing your status can significantly alter your refund (or tax bill).

Now, what about next year?  What can you do differently this year that will save you money?

  • One of the biggest ways to save money on your taxes is to BUY a home.  Not only will you save money because you can deduct mortgage interest and property taxes, but you will also be building equity in something that you own.  No more paying rent (buying a house for your landlord).
  • Go back to school!  Finish your degree, take classes for work, or learn something totally new.  Many educational expenses qualify for tax breaks, just be sure to do your research in advance so you’ll know if what you sign up for qualifies.
  • Keep paying on your student loans.  You can deduct up to $2,500 in interest on your student loan interest every year, even if you don’t itemize.  So, keep paying on time!
  • Donate to charity.  While it’s always nice to make a few dollars when we sell old clothes, furniture, and such online or at garage sales, it may be more beneficial to you if you donate it to charity.  Just keep the receipts and itemize your deductions (if you qualify).
  • Make pretax contributions to a 401(k), 403(b), or 457 retirement plan.  The more you can contribute pre-tax, the more you’ll save on your income taxes.  For 2020, the maximum 401(k) contribution is $19,500. If you’re age 50 or older, you can make an additional “catch-up” contribution of $6,500, bringing your total 401(k) contribution limit to $26,000. The limits for 403(b) and 457 plans are the same.

Still think you can’t save money on your tax bill?  Remember, the more attention you pay to your finances throughout the year, the easier it becomes to save money on taxes (and everything else) when the time comes.  So, get busy!  Pay attention!  And have a great year!

 

Should I Be Concerned About Federal Tax Reform?

Although the 2016 tax season is upon us, there is a lot of talk about what changes might happen to our tax system going forward.


First, I can’t resist citing some of the more famous quotes about taxes.

Benjamin Franklin said, “In this world nothing can be said to be certain, except death and taxes.”

Will Rogers stated, “The only difference between death and taxes is that death doesn’t get worse every time Congress meets.”

Albert Einstein opined, “The hardest thing in the world to understand is the income tax.”

While we might all agree that we don’t like taxes and we’d like them to be simpler, what would tax reform look like?

It may be worthwhile to consider the history of personal income taxes in the U.S. The income tax was introduced during the Civil War in 1861 and was expanded during World War II. In short, revenues were needed to cover large obligations. In between those periods and now, there have been numerous changes, tweaks and adjustments. Our country’s obligations have not gone away, so taxes probably will stay around for a while.

Tax reform is nothing new, and some degree of tax reform seems likely. In early 2016, Republicans in the U.S. House of Representatives published a tax reform summary of policies, or “blueprint,” that could form the basis of new tax legislation in 2017. President Donald Trump campaigned on the promise of large-scale tax reform. Late in the campaign, the Trump camp released a revised tax plan that moved the candidate’s proposals closer to the House Republicans’ plan.

For now, it may make sense to focus on provisions common to both the Trump plan and the House GOP blueprint, which include:

  • Reducing the number of income tax brackets from seven to three (12%, 25% and 33%).
  • Increasing standard deduction amounts and limiting use of itemized deductions.
  • Repealing the federal estate tax, alternative minimum tax and 3.8% net investment income tax.
  • Lowering the business tax rate from 35% to 15% (Trump plan) or 20% (House Republican plan).

Many differences must be ironed out among all parties.

Who will be affected, and what, if anything, should you do about it?

“People who complain about taxes can be divided into two classes: men and women.” — Unknown

Nearly everyone could be affected by these changes – corporations, individuals and small businesses (most of which are held as sole proprietorships, partnerships or S-Corporations and are taxed at the personal income level). As a result, nearly everyone could be affected by these changes.

Without the benefit of a crystal ball, here a few tips to consider during this period of uncertainty:

  • Pay attention to your deductions. If the standard deduction increases, it may benefit folks who have paid off a mortgage and no longer deduct the interest expense. On the other hand, a lot of people don’t take the time to itemize, even though it could benefit them.
  • Review your estate plan. A periodic review can be a good idea for nontax reasons, but for those with larger or more complicated estates, it might be a good idea to speak with your legal and tax counsel to review various scenarios if estate taxes go away completely and are replaced with something else.
  • Review your investments from a tax perspective. As the saying goes, “It’s not what you make, but what you get to keep,” and this is especially true during periods of tax adjustments. Aside from the price effects to your investments from all of the tax change talk, consider how your investments might benefit, or suffer, from tax reform. For example, if your portfolio is heavily concentrated in municipal bonds, will they still make sense if you land in a lower tax bracket down the road? Or if dividends end up being taxed at a lower rate, will dividend-paying stocks look better?

While it’s impossible to predict exactly what new tax legislation will look like, or to cover all the potential effects of tax reform, it might not hurt to consider some of the possibilities that could affect you. Remember, as we say here in Texas, “Just like the weather, if you’re not happy with the current tax structure, wait a minute, and it will change.”

Speak with your tax and legal counsel regarding your personal situation.

 

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‎02-20-2017 07:30 AM

Content provided courtesy of USAA.

By Robert Steen, CFP, MBA