Tax Tips from The Savvy Investor

Screenshot 2014-12-15 15.34.09On December 15, 2014 Congress passed the Tax Increase Prevention Act of 2014…just in time to avoid shutting down the government! The passage of this act included many provisions that we rely on to reduce and minimize our tax liability.

They didn’t leave much time for tax planning before the year’s end, but here are some tips you should consider:


The IRS will never initiate contact via telephone.  They will always send you (and your spouse) notices – and I do mean notices, several of them, before they start the collection process.  Unless you have contacted them and are dealing with a specific person, they will not call you or email you.

Furthermore, they will not threaten to take you to court or have you arrested. If you receive one of these calls, ask them to hold on and conference in the police  department, or better yet, call the IRS directly at 800-829-1040.  See how quickly they hang up the phone.

TIP #2:  RMD’s

If you are currently subject to required minimum distributions, the provision allowing for a direct transfer of your RMD to a charity of your choice was extended.  This provision allows you to direct the custodian of your IRA to send up to $100,000 directly to the charity, thereby eliminating the income on your return and all the phase out issues that may accompany your donation.

To meet with a Tax Planning Professional click HERE and Enter the Promo Code Taxes2014

TIP #3: “Harvesting” Capital Losses

For many investors, tax gain/loss harvesting is the single most important tool for reducing taxes now and in the future. If properly applied, it can save you taxes and help you diversify your portfolio in ways you may not have considered. Although it can’t restore your losses, it can certainly soften the blow. For example, a loss in the value of Security A could be sold to offset the increase in value of Security B, thus eliminating the capital gains tax liability of Security B.

For example, suppose you invested $1,000 in Fund A and $1,000 in Fund B. Two years later, your Fund A is worth $1,500 and your Fund B is worth $500. If you sell both funds today, you will realize a $500 capital gain on Fund A and a $500 capital loss on Fund B. The gain and loss would offset each other and you would not owe any tax.

Cautions and Tips for Tax Loss Harvesting

Some investors like to buy back at a later date the same fund they sold (harvested). Before doing this be aware of the IRS Wash Sale Rule which essentially says that an investor cannot buy a substantially equal security within 30 days (before or after) the sale.

AND REMEMBER, if your income is in the 39.6% tax bracket, your dividend and capital gains rates could be as high as 23.8%.  Offsetting some of those gains with losses might make sense.

TIP #4: Tax Free is Good!

PART I:  Review your portfolio for gains – if you are already considering selling appreciated stocks or other assets, selling them before the end of the year could save you lots of money.

If you are in the 15% tax bracket you’ll pay 0% on long-term capital gains.  In 2014 you are entitled to 0% capital gains rates if your taxable income is $36,900 or less if you are single, and $73,800 or less for married filing jointly.

PART II:  Consider the benefits of a Roth IRA or a Roth401(k).  You do not get the normal up front tax deductions but all the growth and income created in the account will be tax free when you distribute it later – provided you wait at least 5 years.

PART III:  Life Insurance, the type that has cash value building up, can be withdrawn tax free – either by taking loans against the death benefit or withdrawing the principle.   Make sure you talk with a professional about the specifics with these types of policies because the rules can be complicated.

To meet with a Tax Planning Professional click HERE and Enter the Promo Code Taxes2014

TIP #5: Maximize Your Schedule A

Taxpayers frequently have some control over when they pay their expenses.  This timing may impact the amount of taxes you pay.

Pre-pay private health coverage

If you are currently privately paying for health care, they may be subsidies available to help offset those premiums:  in general there are advanced premium tax credits, cost sharing reduction subsidies, and even Medicaid available to help with premium.  As a rule of thumb, if you make less than $46,680 as an individual or $95,400 as a married filing jointly, you will qualify for some sort of assistance.

State and local tax payments

Taxpayers often have some flexibility in determining when to make state and local tax payments. Such payments include income, real estate and personal property taxes. All of these items may be deductible for you depending on your tax situation. Review your state’s laws or talk with your tax advisor to determine whether you have flexibility to delay these payments into next year. The delayed payment, and subsequent increase in tax deductions, may provide some tax savings if tax rates increase.

If you expect your income to drop next year, you may want to bundle your deductible expenses this year:  medical, mortgage payments, charity, etc.

Don’t forget to use up the balance in those flexible spending accounts.

If, instead, you decide to exercise ISOs and sell the stock, you may want to consider selling by year-end to take advantage of 2012’s lower ordinary income tax rates. As with NSOs, you’ll want to include your Financial Advisor, who can discuss the market outlook for the stock, in your decision-making process.

TIP # 6: The IRS commissioner doesn’t even do his own taxes. Should you?

It’s not what you know that’s important here. It’s what you don’t know . . . or, more to the point, what you think you know and really don’t.

To meet with a Tax Planning Professional click HERE and Enter the Promo Code Taxes2014

If this is your first time filing taxes, and you think they may be relatively simple, try doing them yourself first. If you don’t itemize and have few deductions, filing should be relatively easy. Try using a software program or book, or do your taxes online.

On the other hand, if your taxes are complicated, have bought or sold investments during the past year, or if you are filing business taxes rather than personal, you may be better off paying a professional, at least for the first year or two. During the process, ask a lot of questions and make sure you understand what is going on.

Pay for advice, not typing skills

It’s not the title that’s important. It’s the way the preparer approaches your return.

If you go to a tax preparer who just takes your numbers and inputs them into your return, you may have wasted your money and time. The key is finding an individual who specializes in taxation and keeps up with tax trends and changes in tax law.

What you should pay for is advice and direction. More specifically, here’s what to expect:

A good tax preparer starts by asking a lot of questions. The only way you’ll get your money’s worth is if the preparer understands what you do and how you do it — and then scours for every legitimate deduction.

A good tax preparer is a teacher who educates you not only on what’s allowable as a deduction but also on how to structure your activities to minimize your tax exposure.

A good preparer focuses not only on your current year transactions, but also on how you can reduce your future taxes – that is the difference between a tax preparer and a tax planner.  Pick a planner.

Clearly, a tax attorney is going to be more expensive than an enrolled agent or a storefront tax preparer. But if your income justifies it, the more sophisticated advice and direction should more than offset the additional cost.

What’s the difference among tax professionals?

There are many types of tax professionals and their training and qualifications can vary greatly. Pros don’t need any particular education or certification to prepare somebody’s tax return, although they do need to be a Federally Authorized Tax Practitioner (FATP) to be able to represent you in dealings with the IRS. The most common FATPs are enrolled agents, certified public accountants (CPAs) and attorneys.

Enrolled agents must pass a certification exam or have qualifying experience as a former IRS employee and should be more than competent to handle most tax returns.

CPAs meet extensive educational and experience requirements, pass a comprehensive exam and stay current on tax issues. You may want to work with a CPA if you have an especially complicated return. If you choose to have your taxes done at a reputable accounting firm, chances a CPA will at least review your return before it is filed.

Tax attorneys generally handle the most complicated of tax issues such as business partnerships, estate planning and tax violations.

Maryland now requires all paid preparers to be registered with the State.  To see if your preparer is required to be registered (EA’s, CPA’s, and Attorneys are not required to register) go to their website.

Plan now!

The provisions discussed in this report may impact you in many ways. It is important to talk with your Financial Advisor and Tax Advisor to understand the full impact on your investment plan and your taxes.

To meet with a Tax Planning Professional click HERE and Enter thePromo Code Taxes2014

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