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The term “tax season” might make you think about the dreaded task of collecting W-2s, 1099s, donation receipts, mortgage interest statements, and other documents needed to complete your tax return. Tax season certainly involves all of that.

It also can be a great opportunity to work with your accountant to obtain key information to help you make informed impactful financial planning decisions. Make the preparation and filing of your 2020 tax return more than just another item on your “to-do” list.

Here are 7 questions to ask your accountant this tax season:

1. Am I eligible to make an IRA contribution?

An IRA is an Individual Retirement Account. Often, it is one of the key tools investors use when saving for retirement. To contribute to an IRA, you must have “earned income.” You cannot contribute more than you earned in a year.

The IRS sets forth annual contribution limits. For 2020 and 2021 those limits are $6,000 for those under age 50 and $7,000 for those age 50 or older. Income thresholds can reduce your IRA contribution and deduction limits if covered by a retirement plan at work.

Roth IRA contributions may be reduced or eliminated if your modified adjusted gross income reaches a certain threshold. Click here for more information. Given this, work with your accountant as you determine your eligibility to make an IRA contribution. Click here for more information on Traditional and Roth IRAs.

If you are self-employed, you may be able to make a SEP IRA contribution. Please ask your accountant or tax preparer about that as well. If you haven’t made your 2020 contribution, there is still time! The deadline for making a 2020 IRA, Roth IRA, or SEP contribution is April 15, 2021.

2. Should I consider a Roth IRA conversion?

A Roth conversion refers to taking some of the balance in a traditional IRA and moving it into a Roth IRA. When converting funds from a traditional to a Roth IRA, you must pay taxes on the balance converted in the year of conversion.

However, once the balance converts to a Roth IRA, it can grow tax-free. It remains tax-free when withdrawn as long as it has been open for at least five years.

Also, you must meet at least one of these conditions:

  • You are at least 59 ½ years old.
  • You pass away.
  • You become disabled.
  • Make a qualified first-time home purchase.

Here are some other reasons why you may want to consider holding funds in a Roth IRA. While the thought of paying taxes on the balance converted seems daunting, there are various tax strategies surrounding Roth conversions to make the conversion advantageous from an income tax or estate planning perspective.

3. What is my estimated tax bracket for 2021?

Knowing your estimated marginal tax rate is incredibly important when evaluating income deferral or acceleration strategies. We reviewed this topic at length in our 2020-2021 Perspectives booklet. Please click here to see the article “How Can I Use My Marginal Tax Rate Bracket in My Year-end Tax Planning?” on page 8.

4. Do I have any loss carryforwards?

While it may not feel good to incur capital losses, they can be useful from a tax perspective. Net capital losses are the amount of total capital losses exceeding total capital gains. Investors can offset ordinary income with up to $3,000 of net capital losses in any one tax year.

Net capital losses in excess of this $3,000 threshold may be carried forward indefinitely until used. Loss carryforwards are considered “tax assets.” They can be used to offset future gains. Therefore, they can play a significant role in your investing and tax planning strategies.

5. Should I change my tax withholdings?

Many taxpayers feel relief or excitement when they hear they are due a large tax refund. Tax refunds really aren’t a good thing. We addressed this topic on page 10 in our 2020-2021 Perspectives booklet. We explained there are better things to do with your money instead of providing the government an interest-free loan.

6. What other things might I consider to reduce my tax liability?

Implementing strategies to reduce your tax liability may be as simple as contributing to a Health Savings Account or maxing out retirement contributions. For business owners, it might be worthwhile to accelerate expenses in one year.

Conversely, defer them into a year when higher revenues or tax rates are expected. There may be more complex strategies you could employ. With key financial information in hand, your accountant can help you identify opportunities to reduce your tax liability going forward.

7. Is there anything my financial advisor can do to help my tax situation going forward?

Most financial decisions you make have corresponding tax implications. Ensuring your financial advisor and accountant are well-informed of your financial and tax situation ensures the decisions you make are the most effective for your long-term goals.

As Benjamin Franklin once said:

“In this world, nothing can be said to be certain, except death and taxes.”

While taxes are an inevitable component of our lives, there are numerous strategies that help you achieve your financial goals more efficiently. Possibly while also reducing your tax burden. We recommend that you meet with your accountant annually to review the above-noted items.

While tax time can be a great time to do this, many find it beneficial to embark on this work when the rush of tax season calms down. As always, thank you for taking the time to read. Please do not hesitate to reach out to us if there is anything we can do to assist you as you work with your accountant this tax season.

Means Wealth Management is a registered investment adviser. The information in this material is for educational purposes only. It is not intended to act as individualized tax, legal, financial, or investment advice. Data contained herein from third-party providers is obtained from reliable sources. 
However, its accuracy, completeness, or reliability cannot be guaranteed. Please consult a qualified attorney or tax professional for individualized legal or tax advice. Please contact a financial advisor for specific information regarding your individualized financial and investment planning needs.