Some CPAs may be too busy to do comprehensive tax projections as part of the tax-preparation appointment, but that should not preclude you from asking the following questions:
1. Will a life event or major purchase affect my taxes?
Please remind them 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?
Death in the family is especially important: Does an inheritance trigger a federal or state estate tax? If an inheritance includes an IRA or 401(k), the tax rules are strict, and failure to properly manage the inheritance could have major tax consequences.
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 homeowners can typically get deductions from only two residences.
2. What will my tax bracket be in 2016?
A tax bracket is the rate at which the last dollar of income will be taxed. Knowing your tax bracket helps you 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 tax filing status. Tax filing status depends on whether your client is married or single and whether there are dependents to claim on the tax return or not. A change in income or an increase in interest and dividends or even gambling or lottery winnings could also change a tax bracket.
3. Can you help me estimate my income for 2016?
Go beyond salary. Bonuses, freelance assignments, investment income, alimony winnings, and more all play a role. And it's not enough to know gross income. It's also important to have an estimate of adjusted gross income, modifications to adjusted gross income, and taxable income. Each of these types of income is dependent on various deductions or credits that need to be estimated in order to come up with projections for the new year.
4. Do I have any remaining loss carry forwards going into 2016?
Loss carryforwards are tax losses as a result of selling investments at a loss. The IRS only permits deducting investment losses to the extent that they are exceeded 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 carryforwards."
Your CPA can determine your loss carryforwards by looking at past tax returns. The answer can help you better understand how investment activity affects your tax situation. "Tax loss harvesting" is traditionally a year-end activity, but it really should take place throughout the year as investment opportunities present themselves.
5. Am I eligible for a Roth conversion? Is it recommended?
A Roth IRA conversion allows workers to convert traditional IRA assets to a Roth to avoid taking required minimum distributions in retirement and avoid paying tax on any distributions taken. A Roth conversion also involves paying taxes on the assets converted, since contributions to traditional IRAs are made on a tax-deferred basis. A CPA can estimate the tax that would be due on a Roth IRA conversion.
You as a client should also ask for an estimate as to what the tax liability would be on a partial Roth conversion—such as one that might bring them up to the top of their current tax bracket. The CPA's estimate of the "bracket-completion" amount is likely to be the most accurate estimate of the tax you might pay in the event of this type of partial conversion.
The CPA is likely to have an opinion on whether a Roth conversion is a good idea or not. I definitely encourage you to discuss the option with your CPA and discuss it with our office before making a decision, as any conversion will have investment and retirement as well as tax consequences.
6. Should I increase my retirement plan contributions?
The IRS hasn't increased the contribution amounts for some types of retirement plans in 2016, so there's no incentive there for making contribution increases.
Retirement Plan Contribution Limits
Type of retirement account
Additional 2016 contribution
2015 Maximum contribution
401(k), 403(b), most 457 & federal govt. thrift savings
IRA catch-up contributions
401(k), 403(b), most 457 & federal govt. thrift savings catch-up contributions
7. Do you have any recommendations for reducing my 2015 taxes? What about 2016 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.
For example, if you’re a small business owner, you may have the ability to accelerate expenses into a new year. Trusts and estates may be able to take advantage of "do-over" provisions if they act early enough in the year.
8. Should I change my tax withholding for 2016?
Various situations may mean that you need to change the amount you withhold from your paycheck. If gotten married, divorced, or had a baby, changes need to made on W-4 form. Also, if you have been getting large tax refunds, it may make sense to increase the number of exemptions on the W-4 to match up what you pay in tax with actual tax obligation.
Most CPAs note that it's better to evenly match withholding with tax obligations rather than aim for a large refund. That's because the funds that make up the refund could be invested, saved, or used to pay down debt rather than accumulating in the U.S. Treasury Department only to be returned back to clients in the form of a refund.
9. Is there anything my financial advisor can do to help my tax situation?
There's a close relationship between financial planning and taxes. That's why it's good for our client's to ask this question of their CPAs and then pass the CPA's answer back to us. The better informed the CPA or tax preparer is about your situation, the more effective we can be in planning and managing your investment and financial affairs. This is the perfect opportunity for three-way communications between you, our office and your CPA or tax preparer.
Of course, as always IIS Financial Services advises clients to seek professional tax assistance in making important tax decisions.
David Hanson & Carl Hanson
Managing Partners, Financial Advisors
IIS Financial Services