'Tis the season : FAQs for tax preparers

NSJ: How can I lower my tax bill next year? 
 
 HS: If you are currently renting, purchase a home, if you can. The money you are paying in rent will go toward paying your mortgage. The mortgage interest you pay on your home loan is tax deductible as well as county and local property taxes. Consider opening a home equity line of credit with your bank or credit union to pay off your consumer debt. You will probably get a lower interest rate and the interest you do pay in 2017 will be tax deductible because it is considered a home loan.  Convert taxable interest and dividends into tax deferred or tax free. You can convert savings you are holding directly into a deferred annuity, a life insurance cash value, or a tax free municipal bond fund. This will either postpone taxes or eliminate taxes. If you are covered under an employer retirement plan like a 401k or 403b, inquire what the maximum amount of your salary is eligible to contribute. If you raise your contribution amount your taxable income will be lower which in turn could lower your tax bill. If you are age 50 or older, the IRS allows you to make catch-up contributions to your IRA or employer plan. If you are 70 1/2 or older, you can make charitable contributions directly from your IRA and it counts toward your required minimum distribution. 
 
 
NSJ: Is there anything that I should be reviewing with my financial advisor about my investments that could affect my taxes for next year? 
 
HS: It is easy for your financial planner to assess the income taxes you are paying on your investment income by reviewing your tax returns. If you are not spending your after tax investment income and simply saving it for a rainy day, retirement, or to leave as an inheritance; you might want to consider shifting some of it to a tax deferred annuity or life insurance cash value. And now, some annuities and life insurance allow for withdrawals on a tax favored basis to pay for long term care expenses.  Income taxes on your current or upcoming Social Security are calculated based upon your other taxable income. Your financial planner can help you lower your taxable income possibly through a Roth conversion.  Medicare Parts B & D have a surtax for high income individuals and couples which are calculated with your Modified Adjusted Gross Income MAGI. Medicare calls it Income Related Monthly Adjustment Amount IRMAA. This is another big expense in retirement that your financial planner can help you navigate. A Roth IRA is a great planning tool to keep your net taxable income below IRMAA thresholds. If you are approaching age 70 1/2 or past that age, required minimum distributions from your IRA create additional taxes. Your financial planner can help you plan for these. Just taking the minimum distribution from your IRA and stockpiling taxable money in your IRA is not a smart estate planning strategy.
 
 
Hans E. Scheil, CFP®, is the CEO of North Carolina-based Cardinal Retirement Planning, Inc. and the author of “The Complete Cardinal Guide to Planning for and Living in Retirement.”


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