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Two Things That Minimize the Pain of Tax Time


Two Things That Minimize the Pain of Tax Time

“In the spring a young man’s fancy lightly turns to thoughts of love,” famously wrote the 19th Century English poet Alfred Lord Tennyson. Sadly, for the rest of us, our thoughts generally turn to taxes. The filing deadline (April 18th this year due to some calendar idiosyncrasies) is right around the corner.

There are two things to do right now to minimize the pain:

  1. Carefully organize all of the documentation your tax preparer will need so that he or she won’t have to charge you extra for the time it takes to unscramble a chaotic pile of documents presented in a shoe box, and
  2. Get ready to work with your tax or financial planning professional to make sure you won’t be paying in more than necessary in taxes a year from now.

Avoid, Don’t Evade

Remember, you owe it to yourself, or maybe your kids or grandkids, to engage in tax “avoidance.” That is, avoid paying taxes unnecessarily. That’s not the same as evading taxes, a.k.a. tax evasion, that can land you in jail.

Regarding the first step, double-check, as best as you can, to make sure that W-2s and 1099s you accumulate are accurate. A good tax preparer might spot discrepancies, but don’t take that for granted. For example, if capital gains distributions form a mutual fund are mischaracterized as dividend distributions, you could lose the ability of using capital gains to offset capital losses. If your income is overstated on a W-2, you’ll have a larger income tax liability.

You can still sneak in a 2016 contribution for an IRA (Roth or conventional) by April 18. But if your earnings are too high to take a tax deduction for it, it won’t impact your 2016 tax bill. And if you’re self-employed and have a SEP IRA, your deadline for your 2016 contribution could be even later (six months later, to be specific) if you file for an extension by April 18 using Form 4868.

Tax Reform? Really?

Politicians always talk about how terrible it is that the tax code is so complicated, and promise to make it simpler and fairer. Don’t hold your breath: It’s Congress that passes the laws that make the tax code complicated in the first place. They can’t help themselves.

Their goal isn’t to give you a headache. Rather, when they can’t do so directly by law, they want to influence your behavior one way or another using the tax code, in theory at least, for a good cause. That could be saving for retirement, contributing to charity, buying a home, investing in particular industries or kinds of securities, hanging on to the investments you make for a year, or cushioning the blow of losing money on an investment so that you’ll be able to continue investing.

One person’s tax “loophole” is another’s tax “incentive.” By planning your 2017 investment, savings and charitable and estate planning strategies with your advisor today, you’ll be in a much better position to maximize your tax avoidance come April 2018, perhaps putting you in a mood so that your thoughts can turn to love instead of bitterness towards the tax collector.

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