Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.
Parents can minimize the financial burden of child care by contributing to a dependent care flexible spending account, according to Morningstar. Funded with pre-tax dollars, these accounts allow clients to pay less in taxes. However, it reduces the amount of Child and Dependent Care Credit that they may claim for raising their children. For instance, if a client sets aside $5,000 of pre-tax money in a dependent care FSA, they must deduct that amount from the child and dependent care credit they are otherwise eligible for. Another drawback is that these accounts, unlike health-savings accounts, are use-it-or-lose-it tax features. Any money set aside, but unused by the end of the year, is not available the following year.
The tax season offers an opportunity for clients to review or develop a strategy to enhance their tax savings on their investments, according to the Los Angeles Times. To achieve a tax-efficient portfolio, clients should prefer tax-efficient investments and invest in accounts that provide tax benefits. They may also include tax-loss harvesting in their tax plan to write off taxable gains using their capital losses. Another option to consider is a Roth IRA conversion for tax-exempt growth on savings and tax-free distributions.
If your clients pay the alternative minimum tax, these funds can help lower their tax liability.
Taxpayers can deduct their medical expenses on their 2016 returns if the costs go above 10% of their adjusted gross income, or 7.5% if they reached 65, according to this Kiplinger article. The threshold for 2017 is 10% for all taxpayers regardless of age. The tax break can be claimed if they opt for itemized deduction. Qualified medical expenses include health insurance deductibles, co-payments, prescription drug costs, as well as vision, dental care and other expenses not covered by their health insurance.
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Gearing up for tax season? Here are two things to consider when planning for your wealthy clients.
January 21 -
There is nothing simple about taxes. Combining taxation in dozens of countries with that of the United States brings even greater complexity.
May 15 -
For a high-income individual taking an unexpected hit, a Roth IRA conversion can be a smart solution.
February 18
Using the tax refund to pay down debt is smart; however clients should develop a strategy to maximize the benefit, CNBC reports. When choosing which debt to pay down, clients should account for the interest rates of these loans, as well as their promotional offers and payment period. Clients should also consider the tax advantages and protections the debt carries, such as tax deductions for home mortgage and student loans.
Clients usually collect taxed, tax-deferred and untaxed income in retirement, according to this Motley report. Maximizing these earnings is a matter of minimizing the tax bite and boosting the tax benefits offered by their retirement accounts. Retirees on Social Security should ensure that they draw taxable income below the taxation threshold to avoid facing tax on a certain portion of their benefits. These clients should consider making withdrawals from their tax-deferred accounts before they reach 70 1/2 in order to reduce the amount of mandatory distributions that could push them to a higher tax bracket.
