How planning now can yield big savings next April

Unless you happen to be an accountant, you probably don’t like to spend a lot of your time thinking about taxes. Let’s face it. Even CPAs know that there are many things more interesting than tax planning and compliance. Yet while taxes may seem a bit tedious, you may be interested in the possibility of keeping more of your hard earned money. So while taxes may not get your juices flowing, it just might be worth your time to take a little closer look at opportunities to minimize your upcoming tax bill.

When is the right time to plan for tax reduction? You might be surprised to know that proactive tax planning throughout the year can lead to big savings come tax time. In fact, many opportunities for tax reduction require action in the year preceding the filing of your tax returns. What can you do now to reduce your tax bill next April?

First, ensure you are compliant and paying your taxes on time. If you haven’t paid sufficient withholding, you might want to update your W-4 to withhold more to adjust for any deficiencies. If you were given a raise at the end of last year, you may not have adjusted your withholding amounts – meaning you might not be withholding enough of your income to cover your tax liabilities. If you are married filing jointly, there may be other variables in the equation as well. Bonuses should be considered as well as any other income you may have such as rental property, interest and dividends, and stock sales etc. It is important to know all of your reportable income and its effect on your taxes in advance of filing next year’s return.

Next, be sure to avoid penalties. Remember that even if you file an extension, all unpaid taxes are still due April 15. If you owe money, it is critical that you pay any unpaid liabilities even if you don’t file the return timely. Also be sure that you file all returns even if you don’t have the money to pay. If you file and don’t pay, the penalty is 0.5 percent of your outstanding tax bill for every month, which may not be desirable, but is far better than the alternative penalty of 5 percent per month for not filing a return at all. If you are a business owner, be sure that your quarterly payments are accurate and submitted on time. Remember, your tax payments are due in full quarterly, not at the end of the year or on the date your return is filed.

Optimize your retirement contributions. Tax savings opportunities are often tied to health care, retirement and investment contributions. These opportunities are frequently accessed through employer provided benefit plans, and most employers provide only a small window of opportunity each year within which you can make changes to your contribution elections. For many employers, these open enrollment periods fall in the final quarter of the year – meaning you may have an upcoming opportunity for savings.

Always take full advantage of matching employer contributions to 401(k) plans. Contributing less than the employer matching amount is simply refusing money. ROTH 401(k) plans are a new investment savings alternative being offered by many employers that you may want to consider. A ROTH 401(k) is the same as a 401(k), but contributions are made with after tax dollars. A ROTH 401(k) is much like a ROTH IRA, but the ROTH 401(k) has a larger annual contribution limitation. Don’t forget about your IRA or ROTH IRA. IRA contributions can help you minimize your tax liability for the current year, while ROTH IRA contributions can save you money down the road.

Don’t forget medical savings plans. Health savings accounts (HSAs) are also a valuable tool to shield income from taxes. The balances in your HSA accounts roll forward from year to year, so it is generally a good idea to make the maximum contribution. While HSAs are only available to individuals on high-deductible health plans, FSAs (flexible spending accounts) can also provide tax savings – but FSAs come with an important catch. FSAs accounts do not rollover from year to year in their entirety. Only $500 from an FSA account can rollover from year to year, so it is important to carefully consider contributions to your FSA.

Business owners should consider income distribution alternatives. For owners of corporations or pass-through entities such as S-Corporations and partnerships, decisions related to how to withdraw income from the company can have a significant impact on tax liability. Increases in dividend and capital gains tax rates, along with the surtax on net investment income, make income distribution planning more important than ever. Pass-through entity shareholders also have a variety of taxes and incentives that could affect their total tax liability, including additional Medicare taxes, self-employment taxes, alternative minimum taxes, as well as wage-based credits and incentives. With so many moving parts, the right answer for income distribution for tax minimization is unique to every situation.

Don’t forget about capital gains, qualified dividends and Medicare tax on investment income. Have you sold any investments in 2014? If so, it is important to understand the tax ramifications. In 2013, tax rates for certain taxpayers increased substantially for capital gains and qualified dividends. Taxpayers with income in excess of $450,000 now pay 20 percent capital gains and qualified dividends tax, while taxpayers with Modified Adjusted Gross Income in excess of $200,000 ($250,000 for couples) are subject to a 3.8 percent tax on next investment income. These increases in capital gains and dividend rates, along with the Medicare tax on net investment income increase the importance of planning when selling investment assets.

Timely planning is the key to savings. While taxes may not be the most exciting thing to think about, a little bit of thought now will go a long way toward reducing liability next spring and eliminating potential headaches down the road. Here is the best news – you don’t have to sort through all of this alone. Make plans now to sit down with your tax advisor. A qualified tax advisor can help ensure that you are compliant and taking advantage of all opportunities for savings. Remember, the sooner you plan, the more opportunity for savings you will have. If you want to get started with your 2014 tax planning or want to take a fresh look at a previous plan, call Presti & Naegele today at 212-736-0055.