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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 all the other documents needed to complete your tax return. Tax season certainly involves all of that, but it also can be a great opportunity to work with your accountant to obtain key information that can help you make informed and impactful financial planning decisions. Here are 7 questions to ask your accountant this tax season to make the preparation and filing of your 2020 tax return more than just another item on your “to-do” list.

1. Am I eligible to make an IRA contribution?

An IRA is an Individual Retirement Account and often is one of the key tools investors use when saving for retirement. In order to contribute to an IRA, you must have “earned income” and 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. There are income thresholds that can reduce your IRA contribution and deduction limits if you are covered by a retirement plan at work. In addition, Roth IRA contributions may be reduced or eliminated if your modified adjusted gross income reaches a certain threshold (click here for more information). Given all of this, it is important to 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 eligible to make a SEP IRA contribution so please ask your accountant or tax preparer about that as well.

Keep in mind that 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 or all of the balance in a traditional IRA and moving it into a Roth IRA. When converting funds from a traditional IRA to a Roth IRA, you are required to pay taxes on the balance that is converted in the year of conversion. However, once the balance is converted to a Roth IRA, it can grow tax-free and will remain tax-free when withdrawn (as long as the Roth IRA has been open for at least five years and you meet at least one of these conditions: you are at least 59 ½ years old, you pass away, you become disabled, or you 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 that is converted can seem daunting, there are various tax strategies surrounding Roth conversions that can 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. This topic was reviewed at length in our 2020/2021 Perspectives booklet, please click here and 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, these losses can be useful from a tax perspective. Net capital losses are the amount that total capital losses exceed total capital gains. Investors are permitted to offset ordinary income with up to $3,000 of net capital losses in any one tax year and net capital losses in excess of this $3,000 threshold may be carried forward indefinitely until used. Loss carryforwards are considered “tax assets,” as they can be used to offset future gains and, therefore, can play a significant role in your investing and tax planning strategies.

5. Should I change my tax withholdings?

Many taxpayers feel a sense of relief or excitement when they hear they are due a large tax refund, but tax refunds really aren’t a good thing. This topic also was addressed on page 10 in our 2020/2021 Perspectives booklet, where we explained that there are far better things you can do with your money during the year instead of providing the government with 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 your retirement contributions. For business owners, it might be worthwhile to accelerate expenses in one year or, conversely, to defer them into a year in which higher revenues and/or tax rates are expected. There may even be other, more complex strategies you could employ. With all of your key financial information in hand, your accountant will be able to help you identify what opportunities, if any, you may have for reducing your tax liability going forward.

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

Most, if not all, of the financial decisions you make have corresponding tax implications. Ensuring your financial advisor and accountant are both well informed of your full financial and tax situation will help ensure the financial 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 can help you achieve your financial goals more efficiently, possibly while also reducing your tax burden. We recommend that you make a point to sit with your accountant at least annually to review the above-noted items. While tax time can be a great time to do this, many also find it beneficial to embark on this work when the rush of tax season has died down.

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.