February marks the beginning of the rush to get taxes done by April 15th.  I wanted to dedicate this issue to providing information about how to maximize your annual tax preparation experience.  You'll find articles on:

• Questions to ask your CPA when you meet to discuss the preparation of your annual tax return.   
• 2013 marks the first year that we will see the changes from The American Taxpayer Relief Act of 2012 hit.  You will see some tips to avoid these "stealth taxes"

• The IRS rules surrounding IRAs can be tedious, so now is a good time to review the regulations and how to stay compliant so as to take advantage of the IRA and to avoid any unnecessary penalties

I would like to thank Horsesmouth and Financial Planning magazine for some of the content in these articles

I work with many CPA's and if you would like a recommendation on one to help with preparing your tax return please let me know.

Questions to ask your CPA at tax time

You probably have started the tax-time drill by now: Preparing to meet with your tax accountant by gathering your W-2 and 1099 farms, receipts, bank statements, and mortgage documents.  But that's just the beginning.  The real issue is what has changed in your life the past year?  A good CPA will ask you questions, but only you know everything that has happened in the past year.  You have the responsibility to give the CPA the right information - and then ask the question: "Does this make a difference?"

Here are some questions that you should consider and discuss with your CPA in your annual meeting

What kind of difference does a family change make? Or how about a major purchase.  Be sure to tell your CPA about any births, adoptions, marriages, separations, divorces, or deaths.  Have your children reached a milestone age like 18 or 21?  Have they left school and started jobs, possibly changing their deductibility status?  Major purchases can also have a big effect.  A second house may mean another set of home-related deductions.  But probably not a third house, as the homeowners can typically only get deductions from two residences.

What will my tax bracket be in 2014?  Your tax bracket is the rate at which the last dollar of income will be taxed.  Knowing your tax bracket helps you and your advisor calculate the tax efficiency of various investment or financial planning proposals.  A paycheck change is only one factor, so don't make immediate assumptions: tax brackets can change for many reasons, including changes in tax law as well as changes in your tax filing status

Can you help me estimate my income for 2014?  Go beyond salary.  Bonuses, freelance assignments, investment income, alimony winnings, and more all play a role.  An accurate estimate of 2014 income allows you to properly manage retirement savings plans, for example.  And it helps to make sure your financial advisor and your CPAs are communicating with each other and working from the same page. 

Do I have any remaining loss carry-forwards going into 2013?  Loss carry-forwards are tax losses as a result of selling investments at a loss.  The IRS only permits you to deduct investment losses to the extent that they are offset by gains of up to $3,000 a year.  Any losses in excess of this can be carried forward to future tax years, hence the name "loss carry-forwards."

Am I eligible for a Roth conversion-and is it recommended?  A Roth IRA conversion allows you to convert traditional IRA assets to a Roth to avoid taking required minimum distributions in retirement and avoid paying tax on any distributions you take.  Also ask your CPA for estimates as to what the tax liability would be on a partial Roth conversion - such as one that would bring you up to the top of your current tax bracket.

Do you have any recommendations for reducing my 2014 taxes?  What about 2015 and beyond?  CPAs can recommend a number of strategies that might help reduce tax liability in the future.  A variety of laws, such as ACA, have changed the playing field.  SOm eof the strategies may be complex and may need the input of your financial advisor. 

Should I change my tax withholding for 2014?  Various situations may mean that you need to change your withholding on your form W-4 with your employer.  If you've gotten married, divorced, or had a baby, you'll need to make changes on your W-4. 

How to Avoid Stealth Taxes

Lawmakers nowadays do not want to admit to raising taxes and it seems that they raise them in ways they hope we won't notice.  Here is some advice from Ed Slott of Financial Planning magazine on how to avoid being blindsided by the new "stealth taxes" established in The American Taxpayer Relief Act of 2012. 

The stealth taxes generally impact higher income earners and there are five of them that are making their first appearance on 2013 returns 

• The phase-out of personal exemptions
• A reduction of itemized deductions
• Increased tax on net investment income
• Increased tax on earned income
• A decrease in deductible medical expenses 

One strategy that Ed recommends considering is converting your IRA to a Roth.  By converting to a Roth IRA you are moving money to a tax free investment vehicle.  You will pay taxes on the money that you convert in the year of the conversion, but it is often better to bite the bullet in one year than to have a major tax problem when you retire.   Roth IRAs have no required distributions, so if you do not need the money at age 70 ½ or beyond, the Roth IRA can continue to grow tax-free.  Also not all of the IRA has to be converted.  If the tax hit is too big to be taken all in one year, then think about making partial conversions over many years.

Essential Tax Tips for IRA's

IRAs can be a great way to save for retirement because of the tax benefits they provide.  There are various types of IRA's where you can sock away up to $51,000 a year depending on your income and deduct those contributions from your taxes.  Those contributions grow tax-deferred until your retire which can leave you with a pretty sizable nest egg.  Unfortunately there are quite a number of IRS rules surrounding these accounts, and the penalties for running afoul can be quite stiff.  Here we a few tips that can help avoid unnecessary errors

IRA Contributions: Eligibility and operational requirements

Individuals must meet certain requirements in order to be eligible to make contributions to IRAs.  Failure to meet these requirements can result in excess IRA contributions.  Regular IRA contributions must be made from eligible compensation such as W-2 wages/salary, commissions, self-employment income, and other amounts earned from working.

If an individual does not earn income from working outside the home but is married to someone who does, that person's IRA contribution can be based on the working spouse's income. 

The dollar limit for IRA contributions is the lesser of a) $5,500 plus $1,000 for individuals who are age 50 or older by the end of the year, or b) 100% of eligible compensation received by the individual for the year.

IRA contributions must be made by the owner's tax filing date, which is April 15 for calendar year tax filers.

Generally, excess contributions and ineligible rollover amounts that are not corrected by the IRA owner's tax filing due date are subject to a 6% excise tax for every year the amount remains in the IRA.

The 10% Penalty

Distributions that are made from retirement accounts before the owners reach age 59 ½ are subject to a 10% penalty unless an exception applies.  Form 1099-R is used to report distributions from retirement accounts. 

The 50% accumulation tax

IRA owners must begin taking RMDs from their traditional, SEP, and SIMPLE IRAs for the year they reach 70 ½ ad continue for every year thereafter for as long as they live.  Generally RMDs must be  withdrawn by Dec 31 of the year for which they are due.  An exception applies for the year the individual reaches age 70 ½, allowing the RMD for that year to be taken as late as April 1 of the following year

An IRA owner who misses an RMD deadline will owe the IRS a 50% excess accumulation penalty on the RMD shortfall.  The IRS will waive the penalty if the deadline was missed due to "reasonable cause" 

IRA owners who miss their RMD deadlines must file IRS Form 5329 to either report and pay the penalty, or request the waiver if eligible.

The Complexities of the US Tax system

When the 1040 was first introduced in 1913 it had little more than 30 lines and carried one page of instructions. One hundred years later, the form is 87 lines long, not including signatures. The accompanying set of instructions, 206 pages long.  Here is a slide show from MarketWatch showing how the 1040 evolved over the past 100 years.

If that's not enough to convince you how complex the system is, according to the CCH Standard Federal Tax Reporter, as of 2013, it now takes 73,954 regular 8-1/2" x 11" sheets of paper to explain the complexity of the U.S. federal tax code!

Watercooler

If you are looking for fun things to do in March while supporting great charities, here are two events you should consider