As taxpayers prepare to tackle their 1040 forms, local financial advisors and tax experts say tax planning is an important first step.
F. Marc Ruiz, Wealth Advisor and Branch Manager for Oak Partners Inc., said 2015 is a key year for tax planning.
“Starting in 2015 the individual mandate begins to get serious for the ACA (Affordable Care Act) at two percent of income or up to $975 (penalty) per family,” Ruiz said. “If you had qualifying health insurance in 2015 your insurance carrier or employer plan will issue Form 1095. If you didn't, you'll need to use Form 8965 to calculate your penalty.”
Ruiz said ACA premium subsidies are also available in 2015 to taxpayers with incomes up to four times the federal poverty level, which for a family of four is $95,400. That is where tax planning comes into play.
“The subsidies can be considerable for early retirees using assets for income,” Ruiz said. “It’s a good idea to explore ways to shelter income and maybe reduce income needs in order to receive a subsidy. It’s also important to make sure the IRS stays up to date on your family size as the subsidy guidelines are based upon the number of members in your family.”
Ruiz said another consideration this year is that the IRS has tightened up its rules regarding indirect 60-day IRA rollovers.
“The old rule allowed taxpayers to remove funds from an IRA as long as the funds were re-deposited within 60 days,” Ruiz said. “Taxpayers were using multiple IRAs to do multiple indirect rollovers each year, essentially getting access to IRA funds without tax. The new rules allow only one indirect rollover per year per taxpayer, essentially closing this oft-abused loophole.”
Now is a good time, Ruiz said, for small business owners to set up a SIMPLE IRA plan.
“A SIMPLE IRA is an employer-sponsored plan which allows business owners to defer taxes on up to $12,500 of income,” Ruiz said. “SIMPLE IRAs are easy to administer but must be set up before October 1 of this year to be effective for the 2015 tax year.”
Another important change which affects tax planning, Ruiz said, is the extension of the charitable IRA withdrawal for taxpayers over 70-and-a-half.
“This rule enables taxpayers over the age 70-and-a-half that are required to withdraw money from their IRA to have these required distributions paid directly to a charity,” Ruiz said. “If the withdrawal is paid directly from the custodian to the charity the withdrawal amount does not impact the taxation of other income sources and the amount donated to charity is also fully tax deductible.”
The IRS is also allowing annual rollover of Flexible Savings Account (FSA) balances up to $500, Ruiz said. Previous rules required balances in FSAs be used or lost each calendar year.
“This new rule will make it easier to plan for healthcare expenses,” Ruiz said.
Ruiz said Indiana offers attractive tax benefits of a 20 percent state tax credit of up to $1,000 for those contributing to the Indiana 529 college savings plan.
“Credits are great tax benefits because they reduce your actual tax bill dollar for dollar,” Ruiz said. “Contributions have to be made by December 31, 2015 to receive the credit.”
Linda Bourrell, owner of A+ Tax and Accounting Service, said now is the perfect time for taxpayers to review their w4 worksheet to calculate withholding amounts with a tax professional.
“The reason being the worksheet does not take all factors into account when figuring how many exemptions to take,” Bourrell said. “Each year you should discuss your desired range of where you want your tax results to be as well as changes that will affect your tax return.”
Bourrell said changes for 2014 taxes include increases in the standard deductions and exemptions as well as newly-required forms relating to insurance.
Bourrell said her most important piece of advice to clients in regards to tax planning is to “invest in yourself.” Bourrell said this includes contributing the maximum percentage to your 401(k) or, at the very least, matching the employer’s’ maximum contribution. If there is no 401(k) available Bourrell recommends creating an IRA if your income is high now because it reduces the amount of taxable income.
“Presumably less income during retirement equals lower tax brackets,” Bourrell said.
If income is already taxed at a lower rate, Bourrell recommends a Roth IRA.
“These contributions are deposited with after tax dollars and all money earned inside the Roth IRA is tax free after five years,” Bourrell said.
Because tax laws change each year, Bourrell advises against preparing tax returns without the help of a professional.
“At home tax programs, such as Turbo Tax, can walk you through entering information on the documents but if you do not know or understand the tax laws there are situations that these programs can not address,” Bourrell said. “Recent changes to IRS’s preparer requirements require that anyone who charges a fee to prepare tax returns must register with the IRS for a pin number. The IRS has a voluntary continuing education program through which preparers who participate can be listed on the IRS web page as a Registered Tax Preparer.”
Timothy Rigsby, CPA, who is the Managing Principal for Laszlo Rigsby Financial Services, agrees with Ruiz and Bourrell that taxpayers should use professional services both to claim their maximum tax deductions and to avoid costly mistakes.
“The United States tax code is over 75,000 pages long,” Rigsby said. “Stacked page by page, the tax code alone is approximately 12 feet tall. The tax code reads like no other document and is full of ifs and buts that are cancelled out by false positive sentences that then cancel out the last three pages of reading you just read.”
Rigsby said the tax code is constantly changing and mistakes can be extremely costly with interest and penalties adding up to more than the amount of tax owed.
“The tax code is complex and it’s very easy to misinterpret or imply meaning out of context,” Rigsby said. “A professional is more likely to save them money by finding deductions a client has no knowledge of, which in turn, reduces their tax burden. Quite often the taxpayer’s benefits exceed the expense of professional services.”