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Mitlin Financial Inc. - An SEC Registered Investment Advisor - Tax Refund

Tax Planning Is a Year Round Concern

 Tax Planning Is A Year Round Concern

 

Income tax planning is something you need to be aware of year-round and should continuously evaluate.  Although your tax returns are not due until April 15th each year, without extensions, it is important to make sure you are aware of your tax situation all year.  Decisions made over the course of the year that have a financial impact could hinder or improve your tax liability and a little extra work during the year can save you hours of review and alleviate your tax burden too.

When it comes to taxes, it is important to have the right financial team in place. You need to have your wealth management firm, CPA and other advisors on the same page working in your best interest. While you are in the process of, or shortly after, filing your most recent tax return there are several things you can review to make sure you are making the most tax efficient use of your investable assets.

One of the easiest ways for you to alleviate your income tax burden would be to take advantage of investment accounts that can provide a tax deduction. It is easy to see from your previous year’s W-2 how much you took advantage of your company’s retirement plan, be sure to read2019 IRS Limits Affecting Qualified Plans and IRA’s for specific limits. It may make sense for you to consider increasing your contributions in order to lower your income tax liability and concurrently help you increase your retirement savings. Should your company not have a 401(k) or company retirement plan be sure to explore the possibility of using an IRA in a similar manner.

Utilizing different types of retirement savings vehicles would make sense too. It is important for you to understand that all of the money that is being saved on a tax-deferred basis towards retirement will be taxable in the future when you withdraw it. It may make sense for you to utilize a Roth 401(k) option, if available, or a Roth IRA which would enable access to funds in retirement that would not be taxable. By taking advantage of both forms of savings, it will allow you flexibility down the road to have more control over your income taxes.

In addition to retirement accounts, it is also important to have investment accounts that will allow you access to your money at any time without penalty, unlike most of the retirement accounts mentioned thus far. Investment accounts can generate different forms of taxable income, such as dividend income, short term capital gains and long-term capital gains, and you should have a basic understanding of what they are and how they work. Simple things like holding investments for at least 12 months and one day will turn a short term capital gain into a long one, which can mean a significant tax savings. Have you ever sold an investment only a few days prior to the one-year mark only to pay short term capital gains instead of long term, when there was no imminent need to sell? Mutual Funds should be reviewed carefully as they can produce taxable income and capital gains. It is especially important to know when mutual funds will be distributing their capital gains. We have seen clients purchase funds in early November, only to receive a significant capital gain distribution after only owning it for a few weeks. In these cases, it may make sense to wait to make the purchase or purchase an equivalent investment that has no distribution scheduled.

You will also want to make sure that you have the right investments in the right accounts. It would be ideal for you to place investments that would have the highest tax implications in your tax deferred accounts. Simply placing the highest income producing investments or those you plan to hold short term in the most ideal accounts could save you quite a bit in taxes. When making investments, it is best to place them in the type of account that will help your tax situation based upon their propensity to produce taxable income.

Lastly, you should be reviewing your accounts on an annual basis, around November, to see if there are any opportunities to harvest tax losses. As the end of the year approaches it is important to see if there are ways to mitigate your income tax liability for the year. We know most people do not necessarily like taking losses, but many times it will make sense to take the loss and reduce your tax liability. Should you feel really convicted about the holding, you can always double up the position thirty plus days before the end of the year and on day thirty one sell the initial lot for the loss. This will provide you the opportunity to capture the loss and still own the position, while participating in the upside potential of the holding.

This type of planning is how we assist our clients regularly. In many cases we will coordinate with their CPA to make sure everyone is on the same page and the portfolio changes will indeed be of help to the client. Having an open dialogue between your financial team is important to make sure everything is being done to put you in the best position possible.

Please feel free to contact us, Mitlin Financial, at (844) 4-MITLIN x12 if you or someone you know has encountered tax issues with regards to their investments or simply does not feel their CPA and advisor are on the same page. We look forward to helping you, and them, make the decision that is best for all.

 

This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

Where did my tax refund go?

 

 background bills cash tax refund

 

Does your family rely on your tax refund every year? Do you use your tax refund for a family vacation or use it to pay your real estate taxes for the year? This year is going to be an interesting year for taxpayers who rely on receiving their refund each year, because they may not get one. I bet that got your attention and interest to continue reading.

It is going to be more important than ever to sit down with your CPA and review your year-end tax planning, especially if you have not already. The IRS updated their payroll tax deduction tables earlier this year to better reflect the correct amount of tax withholdings for taxpayers. The new tables reflect the changes in the standard deduction, repeal of personal exemptions and changes in tax rates and brackets. What this means is you may be getting more each week in your paycheck, but at the expense of not over-withholding like you have in the past.

Those of you who have been used to receiving tax refunds each year were receiving them because you withheld more taxes from your weekly paychecks than you needed to. When you file your taxes it is determined how much tax you owe and what you have paid in over the course of the year. Whether the difference is positive or negative will dictate if you get a refund or need to pay. Those that have overpaid taxes over the course of the year will receive a refund and people who have underpaid will owe. Be careful if you are not paying enough into the system during the course of the year as this may cause additional penalties as well.

The ideal scenario would be: your taxes owed and what has been paid wash each other out. Keep in mind, although you may love that refund, you simply provided the government with an interest free loan for the majority of the year.

So why are things different this year? The payroll tax tables have been redrafted to reflect, as closely as possible, the actual taxes owed by the taxpayer. This has increased the amount you are receiving each pay period from your employer and lowered the amount of taxes you are paying into the system. Therefore, when it comes to filing your taxes early next year there is a good chance that you will not be getting the refund you have been accustomed to in previous years because you have received this money all throughout the year.

We see this year, because it is the first year with the new tables, as being a challenge for many CPA’s who work with clients that are unaware of these changes. I can just imagine their clients, who are used to receiving a several thousand dollar refund each year, reaction when they are told their refund is a couple of hundred dollars or worse yet that they owe tax. This is not going to be a pleasant conversation and one that is going to take the CPA time to explain and educate the client. It is not the CPA’s fault, nor did their client pay more in tax (not necessarily the case in all situations) but it was simply a situation where the client received more money all throughout the year.

It is highly suggested that you consult with your CPA now, before their busy season kicks in, and have the conversation so you know where you stand for the year. This will allow you to plan better over the next few months and make decisions that may allow you to improve your tax situation. It also will provide you a few months to make changes to your withholdings if it makes sense for you.

Planning is key and having the right people on your team is just as important.Mitlin Financial assists our clients in having these conversations with their tax advisors and look to help them plan appropriately. We would be more than happy to assist you with any questions that you may have on this topic, including recommending the right tax advisor for you. Feel free to contact us, Mitlin Financial, at (844) 4-MITLIN x12 if you or someone you know needs assistance in planning for their taxes.

This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.