Tuesday, October 26, 2021

A Taxing Ordeal

Ask The CFP® Practitioner

“The best way to teach your kids about taxes is by eating 30% of their ice cream.”                     ~ Bill Murray, Comedian

The last column mentioned that today we’d examine how online shopping and the internet are influencing retail space. Since that time I’ve received questions regarding income tax preparation. Today we’ll focus on the time sensitive subject of taxes and revisit the changing scene of commercial retail space in the next column.

With the April 17th Internal Revenue Service (IRS) tax filing deadline approaching, there’s still time to gather and organize the pertinent information and documentation if you haven’t done so already. For starters you’ll need year-end statements from financial accounts, W-2s, 1099s and K-1s, statements covering any retirement plan account activity, last year’s tax returns, receipts for donations and business-related expenses among other documents. You and your CPA can decide if you’ll need to file for an extension, which has become a common occurrence.

The goal of most taxpayers is to pay less. These suggestions are primarily intended for future planning purposes and meant to get you thinking along those lines.

Tax-efficient investing should ideally focus on meeting your goals, not just on reducing taxes. In other words, don’t let the tax- tail of the dog wag your portfolio. Oftentimes the two objectives will work well together. For example, interest from tax-free municipal bonds is generally exempt from federal and state income tax. This may be an appropriate strategy if you’re in a higher tax-bracket. In some cases interest is subject to the federal alternative minimum tax (AMT) and state or local taxes.

The Medicare payroll tax and surtax went into effect early in 2013. Taxpayers with modified adjusted gross income (MAGI) of $200,000 for individuals, or $250,000 for couples filing jointly became subject to a 3.8% surtax on net investment income or the amount that MAGI exceeds the thresholds. There’s a second 0.9% Medicare payroll tax on wages and self-employment income over the same MAGI thresholds.

Generally, the income derived from tax-free municipal bonds isn’t subject to the Medicare surtax nor are distributions from retirement accounts. However, income from those distributions may cause a taxpayer to exceed the income threshold and expose other investment income to the surtax.

Charitable giving may also reduce your tax liability and provide a sense of satisfaction while helping your favorite causes. Giving appreciated securities to avoid capital gains could reduce net investment income. Establishing a donor advised fund (DAF) has become a very popular way to make future donations and claim a current tax deduction. Contributing highly appreciating assets to a charitable remainder trust (CRT) is another technique used to defer recognition of income over time.

Reviewing previous year’s returns, evaluating changes in income and deductions can help to determine if other strategies like maximizing contributions to salary deferral plans and retirement plans could be beneficial. Discussing your goals with your team of trusted advisors including your CPA and CERTIFIED FINANCIAL PLANNER™ practitioner may reveal additional ways to increase tax efficiency and assist with obtaining overall financial planning goals.

Congrats, you’re getting a refund!

Although refunds are more palatable than owing the IRS, most people’s goal is to break even. If you’re receiving a refund there are a few wise ways to handle this perceived bonus. Consider investing in yourself by contributing to a retirement plan, paying down debt, adding to your emergency fund, or fortifying your investment portfolio. Then remember to talk to your tax pro about making adjustments for next year. Some people are more comfortable pre-paying so they don’t have to worry about having the funds available at tax time.

It may seem like common sense, but the last task is to double-check everything to reduce potential errors. Take time to look up cost basis information on investments you sold and if you don’t have it readily available, your financial advisor should be able to provide this for you. Verify your social security number and simple math calculations.


Be aware that the IRS never contacts taxpayers by email. If you receive an email appearing to be from the IRS, beware that it’s likely a phishing ploy designed to obtain sensitive information for malicious reasons. It’s called phishing because scammers use bait to catch you off-guard. If you receive such an email, forward it to phishing@irs.gov.

The IRS reported that approximately 42% of 2016 returns were self-prepared and 58% prepared by a tax professional. Of the 131.85 million returns filed last year for 2016, 92% were submitted electronically.

When asking my grandchildren questions the reply is often It’s complicated Yaya! If tax preparation is a complex and problematic task, you may want to consider working with a CPA or professional tax preparer going forward. Together with your CFP®, the three of you might uncover new ways to make this annual event less of a taxing ordeal. Stay focused and plan accordingly.

The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. Raymond James does not provide tax, accounting or legal services. Always contact your advisors regarding tax, accounting or legal issues. As with any investments, tax-free municipal bonds include risk. There is no assurance that any investment strategy will be successful.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”

This article provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC, 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email
darcie.guerin@raymondjames.com. Website: www.raymondjames.com/Darcie.

Leave a Reply

Your email address will not be published. Required fields are marked *