Phil Drudy, Member of the Firm, is passionate about year-end tax planning. We recently sat down with Drudy to get the answers to some commonly asked questions.
Why is taking some time now, so key to income tax planning?
People get to the end of the year, and have underfunded their IRAs or 401(k)s, for instance. Let's say they want to put $10,000 into a retirement plan. Very few people will be willing to fund that $10,000 in December. But if they start that contribution now, it will be far less painful.
And there are some employer matching benefits with 401(k)s, aren’t there?
Yes. Let's take that hypothetical $10,000 in employee contribution that I mentioned. If an employer has a policy wherein it meets the first $10,000 with a 3% match, this equates to $3,000 in free money to the employee.
Do you ask your clients to contact you during the year with questions concerning major decisions they may have?
Most definitely, yes. Lives change. There are marriages, babies, new jobs, divorces. Planning around these, consulting with us as we go through the year, can help minimize taxes and maximize wealth. We, as year-end tax planning consultants, can be a sounding board for life's major events. We can offer an objective viewpoint, as well.
Congress is rattling the tax reform cage. Do you think they will get anything passed that will affect this year-end's tax planning?
Any major tax legislation will most likely be a patch-work of laws put together until the next President is in office. Laws surrounding the ACA and new business regulations need to solidify before any new major changes come into play.
Identity Theft. How can your clients avoid this disastrous scenario with the IRS?
We have had calls from clients who have received the fraudulent phone calls from the scammers pretending that they were the IRS and demanding payment from these clients. We, in turn reported these telephone numbers to the IRS. The most important thing to remember is that the IRS communicates primarily through the mail. If after repeated contacts by mail from the IRS, the client has not responded, then there could be a phone call from the IRS.
What do you advise your clients who want a large refund from the IRS?
I have both kinds of clients. Those that want to plan for a refund from the IRS, and those who want to pay the IRS the minimum without owing any penalty. It is prudent for me to advise that the IRS should not be used for an interest free savings account. With planning, we can arrive at the place the client wants to be.
What are your thoughts concerning charitable contributions of appreciated assets?
First of all, someone must be charitably-minded to want to make a charitable contribution. If they want to do this, then giving 100 shares of appreciated IBM stock for instance, would be better for them tax-wise, than giving the same amount of cash to the charity. This is speaking generally, as there are tax thresholds to meet for different kinds and amounts of donations.
Folks that might be retiring this year, or are already retired; what kind of tax planning should they be doing?
Many retirees have re-entered the work force post-2008. The receipt of Social Security benefits, combined with possible earned income can result in interesting tax results, necessitating tax planning. We can also help with figuring out the best time to begin taking Social Security, so as to maximize benefits. We would like to see retirees maintain their lifestyle, while maximizing rates of return, balancing risk, and minimizing taxes.
Do you advise paying off credit card debt with home equity loans?
I have found this to be an interesting conundrum. It makes sense to replace high interest debt with low interest tax-deductible debt. This seems to be a financially sound and tax-smart thing to do. However, my experience shows that a lot of the time, clients have a tendency to charge the credit card back up to high balances, thus actually ending up with more debt overall.
What do you recommend your clients do about record keeping while year-end tax planning?
We were talking about contributions a few minutes ago. Documentation of donations is key. This is an easy item for the IRS to disallow in an audit. If there is not proper documentation, they will simply disallow it. As income tax preparers, we do not audit what the client provides to us for their return. It is the client's responsibility to maintain proper records supporting their tax return.