Your whole world is about investing and the stock market. Stick to what you’re good at and leave things like repairing your car, fixing that leaky faucet, or doing your taxes to someone else-
(1) Don’t take investment advice from a CPA and vice versa.
Notice how we practice what we preach. Our first “tax tip” will be to let you know that for specific tax advice you should NOT go to your investment advisor. We’re not CPA’s and even though we understand a great deal about taxation (specifically with regard to investments) our job is to manage investments, not tax codes.
Why is it then that we see so many accountants, tax preparers, CPA’s, and even “enrolled agents” dole out investment advice around this time of year? Investors naturally gravitate to the professional that sees the majority of their financial house and by default it’s typically a CPA. We’re not bashing CPA’s but allow us to be crystal clear on this point: A CPA has no formal training nor better understanding of investments or the portfolio strategy you or your financial advisor has put together.
Look to Tip #2 on what your CPA should know about your investment situation:
(2) If the introduction hasn’t been made yet…Make it happen!
In the case of investments and taxes one old adage couldn’t be more true: ”The right hand should always know what the left hand is doing.”
If your investment advisor has not met or interacted with your CPA an introduction needs to be made. They don’t have to become best friends but your overall financial situation will be enhanced when key professionals that help you know each other.
(3) What type of tax professional do you need?
Do you simply need a tax preparer? Do you need help with specific tax planning? Are you being audited? Should you use TurboTax?
Depending on your situation, you might need an accountant, an attorney, an Enrolled Agent or a CPA – or perhaps none of them! Not all of these professionals do the same thing. It’s critical to think about what you really need before you start looking. Many folks shopping for a tax advisor are doing so in a pinch. That same group may also be fooled into thinking that bigger is better or that a plush office is the sign of competence.
Lastly, we have to share one simple observation we see from many of the investment clients we talk to and service every year; about 50% of them are getting ripped off and their accountants are basically using a glorified version of TurboTax. If your situation is simple and straightforward enough, there are a number of tax software solutions out there that can guide you, offer customized support, and electronically file your taxes for under $100. If, however, you’re in a more complex situation refer to our last tip…
(4) “Cheaters never prosper” (at least not in the long run).
If you gravitate to an accountant or CPA that brags about how to be “creative” or encourages ways to “push the envelope”, you will both eventually get stung.
The best tax advice is to be honest every step of the way. It’s simply not worth it to hide assets or income from the IRS or take any deductions you’re not entitled to. Even though the chances of an audit are only around 1%, there’s no long-term upside in taking the risk. Keep in mind that there is no statute of limitations on civil tax fraud.
(5) Maximize retirement account contributions.
Only about 5% of 401k participants max out their contributions every year. We commonly hear people say, “my plan is awful” or “the company doesn’t even match”. Folks…those are not good enough reasons to not take advantage of reducing your tax burden and setting yourself up for tax-deferred growth.
Many people also completely forget that they can contribute to an IRA all the way up to the April 15th deadline. If you own a small business consider opening a SEP- IRA (Simplified Employee Pension). The SEP-IRA is a fantastic way to sock away a bunch of money towards retirement. Contributions cannot exceed the lesser of:
(1) 25% of compensation, or
(2) $51,000 for 2013 and $52,000 for 2014.
Lastly, even if you don’t qualify for a Roth IRA due to making too much money, there’s a “back-door” way to contribute to a Roth and enjoy the tax-free growth. You can contribute up to $5,500 (or $6,500 for those age 50 or older) to a non-deductible traditional IRA in 2014, and then immediately convert that amount to a Roth IRA.
(6) We told you to fire your mutual fund but let’s pretend you were stubborn and still own one!
OK…Let’s fess up: Not all mutual funds are bad. (just most of them!)
If you’ve read our opinions on most mutual funds you’ll know that we don’t mince our words on the topic. Aside from the simple fact that over 80% of mutual funds underperform their benchmarks, many are also incredibly expensive and adding insult to injury…completely tax inefficient.
Related to this common mistake is owning investments that provide you more headaches than benefits. For example: Do you have an interest in a business partnership, an S corporation, or a trust that kicks off a K-1 form each year? Is it almost always late or cause your CPA to groan and possibly charge you more for the hassle?
(7) Don’t forget about health insurance.
With the advent of the Affordable Care Act, it’s important that you have health insurance this year. If you don’t have health insurance you will face a penalty of $95 or 1% of your adjusted gross (taxable) income, whichever is higher, starting with next year’s return. The penalty is capped at the average cost of a bronze plan purchased through the federal exchange, but it does increase in ensuing years.
(8) Consider converting a traditional IRA into a Roth IRA.
If you don’t want to pay taxes on your retirement income and you expect to be in a higher tax bracket when you reach retirement age, it usually makes sense to convert your Traditional IRA into a Roth IRA. When you convert you will have to pay taxes on the converted amount minus any nondeductible contributions made to the traditional IRA. If you’re expecting a large refund or your tax bracket was low last year, it might be an excellent time to convert.
(9) What’s the story with the home office deduction?
For years the home office deduction has actually been underutilized by many because of the perception that it’s an automatic trigger for an IRS audit. From our research this isn’t the case anymore as the way people work has shifted and many do not go into a regular office as in years past.
The home office deduction is a great way to decrease your tax liability of entrepreneurs and small business owners working from home, but only if you truly qualify for it. The restrictions and qualifications for this deduction are often misunderstood, so it’s important to do your homework and get it right.
There are two main words you need to be aware of; do you use the office exclusively and on a regular basis? If you are meeting and dealing with clients in this setting or using the area as your principal place of business, you should most likely consider taking the deduction.
(10) Practice “Kaizen”.
Kaizen is the Japanese word for “improvement” or “change for the best”. Whether you do your own taxes or rely on a professional, consider ways to improve how you approach the whole process. Think about setting up a system with which you can file documents relevant to your return as they come in during the year. If you itemize your deductions, organize separate files for charitable contributions, unreimbursed medical expenses, and job-related expenses. Lastly, approach the whole tax year as more than just April 15th or the chaotic weeks leading up to it. Plan throughout the year and set up periodic checkpoints to keep yourself on track. If you rely on a professional make sure they check in with you more than once a year.
(11) It’s not a sin to file an extension.
You have a lot on your plate…It’s better to file for an extension than rush through your taxes or make a mindless mistake that could cost you later. Extensions can be done electronically with your tax preparation software or by mail if you download and complete Form 4868. If you choose this option just make sure to mail it in with your estimated payment by the April 15 deadline to avoid late and underpayment penalties.
One last tip…
There is no shortage of information about taxes or things you should consider around this time of year. With that being said, be careful how you go about looking for help. You undoubtedly found this article or another like it on the internet, but just because that’s the case it doesn’t mean it’s the right advice for you.
The bottom line here is if you need help with your taxes do NOT go to the internet or the Yellow Pages first. We deal with some of the best CPA’s and tax professionals in the industry on a regular basis and not one of them came via an internet search. Word of mouth and the nurturing of a solid business relationship is what helps fill our “Rolodex”. If you need a referral to a ‘top shelf’ CPA please ask us and we’ll be glad to help match you up with someone that suits your personal situation.
Dear Mr. Market: 