Tax Planning: The best investment to make this fall

One of the best financial investments you can make this fall is to spend a little bit of time and a little bit of money to meet with your accountant and start planning your taxes.

Don’t wait until March when your CPA is slammed with number-crunching and tax preparation. She’ll have plenty of free time after the extended Oct. 17 tax deadline. And, it’s about time you used your accountant as more than your “data input” tax preparer. Using your CPA as a consultant can pay off big time.  Here’s how:

Avoid a surprise tax bill

Compare your tax situation from last year to this year.  Are you making more or less money?  Are you withholding the right amount from each paycheck?  Adjusting your withholding can help you avoid a surprise tax bill or refund in April.

If you’ve had any major life changes, such as marriage, children or a new job, you should review your tax withholding to avoid giving the government an interest-free loan, or worse, owing a penalty for not paying enough tax.

If you have uneven income from self-employment income or partnership distributions, you may need to make quarterly estimated tax payments.  Review these payments with your accountant to make sure you aren’t hit with any penalties.

An extra tip for those taking required minimum distributions: tax withholding from your RMD can help offset the need for quarterly estimated tax payments. Ask your CPA how.

Planning opportunities

If you’re earning less income than last year and have retirement savings accumulated, now may be a good time for a Roth conversion.

This is an IRA strategy in which you can take advantage of being in a lower tax bracket by paying taxes now, either on all or a portion of those retirement savings, to avoid a larger tax bill in the future.  Converting part of an IRA can save you loads of money on taxes if you are temporarily in a lower tax bracket.

Planning to donate to a charity during the holiday season?  Ask your CPA about the most tax-efficient ways to give to charity.  For example, by donating shares of stock instead of cash, you can earn the same tax deduction, with an added benefit of avoiding paying capital gains taxes on the sale of that stock.

Or, if you are over 70-and-a-half and have a required minimum distribution and you’re planning on giving to charity anyway, it may make sense to give directly from your IRA or 401(k) through a qualified charitable distribution (QCD).

Smart deductions

Walk through your tax return and talk through deductions you may be missing with your accountant.  When we look over our clients’ tax returns, we often find missed deductions, such as medical expenses, investment adviser fees or tax prep fees, student loan interest and charitable gifts.

Plenty of items tend to slip through the cracks if you aren’t aware they can be deducted.  Often your CPA just doesn’t have the time to ask you about each and every opportunity for tax savings in April, but having this conversation in the fall can bring missed opportunities to light.

It also makes sense to talk to your CPA about the opportunity to realize capital losses during the year if you have any investments that have done poorly.  Tax-loss harvesting can help offset capital gains you may have earned, and capital losses can typically be deducted against ordinary income up to $3,000 if you have a net capital loss for the year.

Empower yourself

Lastly, have your CPA walk you through your tax return as a whole.  You’ll get a better understanding of your tax situation and will be able to proactively think through opportunities for tax savings and deductions in the future.

Even if you don’t have an accountant or use TurboTax, you can still go to a tax-preparation office like H & R Block and have these conversations with a tax professional. Accountants are not like a seasonal fruit stand; they’re open year-round. And if you’re looking to hire a new accountant, Washingtonian magazine has a great list of CPAs in the DC area.