Some surprises bring great joy – a call from an old friend, a door opened, or an unsolicited “You’re awesome!” But walking into your CPA’s office and saying “Oh, one more thing… Did I tell you about a little thing that happened to us last year?” is likely to test her or his humor. There are two types of CPAs – historians and advisors. The first may tell you “Yes, you’re hemorrhaging, and here’s your tax bill for 2014.” The other offers “Here are some ways to stop the bleeding.” Use the conversations now as you work on your 2014 tax filings to prepare for the year ahead. It benefits both – your CPA may have the satisfaction of engaging creativity, research and planning skills, you’ll have more focus on exploring the various paths you may take, and ideally, you’re writing the smallest tax check legally required, and minimizing surprises.
Here are some questions to ask your CPA.
Expected impacts of major changes that are likely to occur in 2015? Three areas of change include family, income and significant transactions.
- Family – Births or adoptions; marriage or splitting the sheets; children advancing in their lives; and death or caregiving. Each may impact filing status, income, expense or asset changes. For example, your child enters or advances in the workplace. Who’s going to file the return, the kid or the CPA? What guidance should be given to them regarding tax withholding, budgeting, saving and investing? Will your tax situation change – dependents, exemptions, credits, kiddie tax, etc.
- Income – Can be either significant increases (business income, promotions or bonuses, option exercise, retirement plan distributions, Roth IRA conversions, investment income, etc.) or reductions (business decline or exit, retirement, unemployment, maturity of a note receivable, paying off debt, investment loss, etc.). Let’s take new business income as an example – spouse becomes an independent contractor, director fees, or an expansion of your business. Will a new entity be formed (another tax return) or file a Schedule C? What management decisions are advised including financing, budgeting and planning, staffing, insurance and risk management, employee benefits, and how should you take money out of the business?
- Significant Transaction – The purchase or sale of house or major asset, business exit or acquisition, inheritance, retirement plan distributions, etc. These too warrant additional planning and engagement of your other trusted advisors. Assume the case of a couple downsizing their home. What’s the likely order of the transactions – sell the current home, take on interim housing, then buy the new place, or take on a temporary two homeownership status until the first home is sold? In the case of the latter, how are you financing the purchase (the current home equity isn’t available until later)? What are the funds required (selling expenses and taxes, move-in costs, down payment)? Will the funds for down payment come from selling investments? A retirement account?
Our estimated 2015 tax bill? Explore opportunities to reduce that bill, and prepare to fund it (adjusting withholdings and quarterly tax payments). Here are three areas to consider for tax reduction.
- Are you saving enough for the future? How should savings be directed to tax-advantaged retirement plans and after-tax investing? Maxing out your 401k contributions may not be sufficient to fund your retirement lifestyle, nor is it prudent to have all of your retirement income to be taxed as ordinary income. If you are the business owner (plan sponsor), what are your options for design or redesign of your retirement plan to tweak the allocation of contributions or expected benefits?
- Eligible for a Health Spending Account (HSA)? If you have a qualifying high deductible medical insurance plan, you may be eligible to fund a HSA. Contributions may reduce your taxable income and may grow tax free if withdrawn for qualified medical expenses.
- High income taxpayers – Don’t forget about the additional 3.8% net investment income tax and 0.9% Medicare surcharge tax (wages and self-employment income) exposures, phase-out of deductions, exemptions, and credits, and utilizing capital loss carryforwards.
Tax planning and financial planning are very intertwined. If I don’t pick up the phone and talk to the client’s CPA of a major potential event, I risk three things: “I didn’t think of that” (another option), client gets a nasty tax surprise come April, or I’ve aggravated the CPA “Why am I hearing about this after-the-fact?” So one last thought… bring a smile and a cup of cheer to your tax accountant. They’re the ones who wrestle with the 74,000 pages of the Tax Code on your behalf. You’re just writing the check.