A young new adviser once approached me and asked, “what book can I read this weekend to gain your tax knowledge.” I smiled as I thought of the decade of effort studying tax law in graduate school, working with tax clients at Deloitte and serving as CFO of multiple companies that forged the ability to see tax savings opportunities. I've also had people come to me with deductions that were not only in error but in my opinion bordering on tax evasion or illegal. Don't even go there, it's not worth it.
There are a plethora of people who will happily take your money and show you strategies that may equate to tax evasion that can destroy your life. I recommend taking all the available deductions to the full extent possible, without running the risk of destroying your financial future by seeking out overly aggressive or illegal strategies to save taxes now and pay dearly later.
We frequently find plenty of relatively simple tax strategies that are overlooked or underused but can be of great advantage to you. Last week, I provided five ideas to potentially save a lot of money in taxes. As promised, here are five more.
Tax idea 6 — get a second opinion
Sometimes we feel that with all the technology we have available to us we can just do our own tax planning. Very simple tax preparation, possibly, but tax planning? I don’t think the technology is quite there yet. We have seen new clients try to save money by doing taxes on their own, and have then shown them where they have left thousands of dollars on the table.
Sometimes we have amended previous returns and gotten thousands of dollars back, but the IRS generally allows you to go back only three years, so in some cases, thousands of dollars were left on the table in previous years, never to be recovered.
If you are dead set on preparing your own return, I recommend at least getting a second opinion from a proactive tax planning expert to see what you may have left on the table. We have clients who received more than 10 times the fee charged in tax savings, and sometimes practitioners will perform this second opinion service for free, in hopes of creating goodwill and possible future business.
Tax idea 7 — excess RMD distributions
The federal government always gets its tax! Not only does it tax earnings, but it wants to make sure that we recognize enough earnings to keep the government wheels rolling. Required minimum distributions (RMDs) must be taken each year from your IRA after age 70½, so the government can tax you on these funds.
If you don’t take enough out, the results are rather draconian. Up to 50 percent of the amount you should have taken as distribution, but didn’t, can be taken away in taxes — ouch! Many people take only what they have to, which is a good idea in many cases, but in some cases, you may want to take out more than you need.
We have instructed some clients to increase their IRA withdrawals above and beyond the amount required to be distributed via RMD because they are in a low enough tax bracket that little or none of this additional withdrawal will be taxed. They don’t have to spend this money, but it is a nice way to get it run through the tax systems at little or no tax cost so that it can be spent outside the IRA or pension plan in a later year when they may be in a higher tax bracket. This is one of those benefits you have to use or you lose it. You can’t go back and take those distributions after year end.
Tax idea 8 — harvest capital losses and defer capital gains