To begin, do not consider all accountants/tax preparers the same. Your situation, while similar to others, is not the same as everyone else. It is not like buying the exact same item at two different retailers and the best price wins.
Because you may not understand all the details of the tax code, you may be tempted to look for the lowest fee charged for your tax return. Just as you expect your doctor to ask questions and inquire about your health, your accountant should ask questions and inquire about your financial health and determine which items might affect your taxes. Here are some items you might want to discuss with your accountant:
Did you add insulation, new doors or windows to your house? You are probably eligible for a substantial energy tax credit.
Did you buy a new car this year? You may be eligible for a separate sales tax deduction.
Do you have a child in college? You may be eligible for a tax credit.
Did you withdraw money from an IRA to pay your child’s tuition? The 10 percent early withdrawal may not apply.
Did you pay interest on an education loan? It may be eligible for special treatment providing a better deduction on your tax return.
Does a relative want to contribute to your child’s college tuition but is concerned about the potential gift tax since it exceeds $13,000? The payment may not be subject to gift tax if it is paid directly to the school for tuition.
Did you sell a home that you lived in 2 of the last 5 years and make a profit of $250,000 if you are single or $500,000 if you are married? You may not be liable for any tax on the profit.
Did you buy a home this year? You may be eligible for the first time home owner credit of up to $7,500.
Do you have investments in your personal account and in your IRA or Retirement Account? Consider this: All money taken out of your IRA/Retirement Account is taxed at the full federal tax rate. All investments related to your personal account fall into specific tax rates which generally are lower than the tax rate of withdrawals from your IRA/Retirement Account. A simple example is stocks purchased and held for more than 1 year. In your regular account, the tax on the profit is a maximum of 15 percent. The same stock sale in your IRA/Retirement account is taxed at the full tax rate for your total income bracket. Talk to your accountant/tax preparer about putting interest-earning investments in your IRS/Retirement account and putting stocks into your personal account. Stock dividends also get a lower rate outside your IRS/Retirement Account. The best decision will not be the same for everyone; you must consider your specific case.
Now that the stock market is down, should you consider converting from a regular IRA to a Roth IRA? You have to pay tax on the withdrawal. However, if you expect the stocks will recover, and then some, you might find it better to avoid the tax later when you take the money out of your Roth IRA as you do not pay tax on Roth IRA withdrawals. Of course you do not get a deduction for payments into a Roth IRA as you do on a regular IRA.
This article was designed to avoid the technicalities and detail that the average person wants to leave to their accountant/tax preparer. The intent is to give you a basis for discussion in doing your tax planning, or preparing for your tax interview. Just giving your W-2 and 1099 forms to your tax preparer may not provide you with the best tax benefit.
This article was prepared by Edward Coblens, a CPA who is a member of the Small Business Advisory Committee, a voluntary organization of the Huntington NY Chamber of Commerce. Business advice is available free to everyone. Call 631 423-6100 for an appointment.