WealthManagement Magazine

Back to Tax School

When clients are helping their kids adjust to the work that comes with the first few weeks of school, it's a great time to remind them that they have some homework of their own to do: tax preparation. Advisors often start discussing year-end tax planning in December, but in many instances, that is past the time when it can be most effective. Here is a brief checklist of things advisors can do now

When clients are helping their kids adjust to the work that comes with the first few weeks of school, it's a great time to remind them that they have some homework of their own to do: tax preparation.

Advisors often start discussing year-end tax planning in December, but in many instances, that is past the time when it can be most effective.

Here is a brief checklist of things advisors can do now to help clients beat the tax man.

Max out retirement savings.

Make sure your clients are maxing out their 401(k)s at work. Remember, for 2004, the maximum contribution is $14,000, but for folks 50 and over, it jumps to $16,000. That is a solid chunk of tax-deferred savings that should not be ignored. In the event that your client has not been contributing enough, there is still time in September to change elections and enable him to max out, says Mark Luscombe, a principal federal tax analyst with CCH, a provider of tax and business law information.

Although the timing issue is different for folks who contribute to IRAs, they still need to plan to have funds available to make contributions when they file their tax returns. For 2005, the contribution limit is $4,000 and the 50+ crowd can contribute up to $4,500. So have them put the money aside now before it disappears in the holiday gift-giving season.

And here's a little suggestion for your high-earning clients. We all owe Uncle Sam 6.2 percent of our earnings to cover the OASDI portion of our withholdings, a.k.a. Social Security. Once your client earns the maximum wage base ($90,000 in 2005), the OASDI portion stops coming out of his paycheck. But since he's been living without that money for the last few months, why not earmark that amount to go right to retirement savings, suggests Bob Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, a monthly journal written for tax professionals. It's an easy way to bump up retirement savings without feeling the pain.

Prepare for surprises.

If your client has generated a big capital gain or sold some real estate, like a vacation home, which is not eligible for the home-sale exclusion, he may owe a bigger tax bill this year. So consider upping payroll withholdings to cover the difference.

In addition, go through his portfolio and start to sell off losers. If the stock is down and you don't see a bounce-back, why wait until year-end? Do some tax-loss selling now.

Next, ask about any recent gambling wins. If your client hit it big in Vegas this year, odds are good he'll get a Form W2-G noting withholdings on his reportable winnings.

“But he can offset those winnings with losses, as long as he can substantiate them,” says Scharin. So it's important to keep good records. And if he hasn't kept track of his losses thus far, he can start collecting his losing lotto tickets between now and the end of the year. If he wins, that's another story.

Take the sales tax deduction.

Technically, 2005 is the last year taxpayers can elect to deduct their annual sales tax paid instead of their state and local income taxes paid on Schedule A.

So analyze your client's current situation. If he already made a big purchase and his sales tax paid is anywhere near his 2005 state and local income taxes paid, it might make sense to accelerate other upcoming purchases. If your client is planning on buying a big ticket item, like a car, boat or a piece of jewelry and the financing is available this year, it could be more beneficial tax-wise to make the purchase before year-end.

Be sure to take the adjusted gross income phase-outs and the alternative minimum tax into account when making these decisions.

Hold the remodel.

If you have a client who is planning on remodeling his home in the near future, remind him that the Energy Tax Incentives Act of 2005 offers some tax breaks starting in 2006. So if it's possible to push off the upgrading, he may see a few little bonuses on his 2006 tax return.

Granted, the credits are not huge, but every little bit counts. The energy bill includes a few breaks for installing energy-efficient products. So if windows or exterior doors need to be replaced, or insulation is added, you client could see a few hundred dollars back on his return.

If a client really wants to go green with gadgets, such as solar water heaters, he can deduct 30 percent of the cost, which will be credited back on his tax return.

‘Tis the season of giving — now.

If your client is charitably inclined, get started now.

Since a client can give up to $11,000 to anyone without incurring gift tax (a married couple can double that amount), have him begin his gift-giving early.

While it seems natural to give gifts around the holidays, it's important to remember that those checks need to clear before year-end to count as a 2005 gift. So your client is cutting it close if he gives a gift on Dec. 25.

Same goes for shares of stock. It could take some time to transfer the title of the shares, and again, it has to be done by midnight Dec. 31 to count as a 2005 gift.

In addition, if your client is interested in putting money or shares in a trust, starting the process in the fall ensures that the paperwork will be complete be year-end.

Miscellany.

Take the opportunity to discuss some evergreen tactics as well. Check for the alternative minimum tax. If your client is a candidate, you may want to consider pushing some of his deductions off to next year, since they may not count under the AMT system.

Then go over his benefit situation. Make sure he's using his flexible spending account to save for nonreimbursable medical and childcare expenses. And check out his disability elections. Remember, if he pays for that insurance with pre-tax dollars, his benefits will be taxable if he ever needs them.

While these tips are not going to wipe out your client's tax bill, they might make the hit less painful. If you start now, you won't have to rush to get these things done during the holiday season.

Imagine that — no rushing during the holidays. Now that's a gift worth giving.

Tracy Byrnes is a freelance writer based in Wayne, N.J.

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