As a professional financial planner, you are probably often asked to help clients with other components of their financial planning, including taxes this time of year. This really is an important part of their total financial planning package. Helping your clients maximize their after-tax income by taking advantage of all of the deductions, credits and deferrals provided in the tax code makes other financial goals such as home ownership, college education, and retirement funds more accessible.
If you are a financial planner who is being asked for advice this tax season, the Rules of Thumb blog from MoneyThumb would like for you to keep the following tips in mind:
- Your clients should always file an income tax return--This should go without saying, but you would be surprised at the number of people who think filing an income tax return is a voluntary act. If your clients received income over a certain amount-depending on their age and filing status-they have to pay tax on that income.
- Tax planning should be handled year-round--Alert your clients that things they do to reduce taxes can be made throughout the entire year. This can ensure they are paying only the taxes they owe, and not a penny more. Advise self-employed clients of your financial planning firm that they use quarterly tax payments. Besides taking the burden off of them for what could be a hefty income tax payment due all at once, this is a great way for your client to review their assets and the impact of those assets on gross earnings.
- Keep good records--Another misnomer, but an important point to make to your financial planning clients when it comes to their taxes. Monthly statements from banks, brokers, mutual fund managers and others who provide financial information should be filed for easy retrieval and safely stored. Remember, the IRS can go back a minimum of three years in a tax audit, and even six years in some cases from the date a return is filed. Let your clients know that it's prudent to not only maintain good records to file correctly, but to keep them for at least six years after the filing date in case of an audit.
- Take advantage of transferring income to non-taxable status--There are a variety of legitimate ways to transform income that would be normally taxable to income that is nontaxable, provided it is spent for certain purposes. Flexible spending accounts, (FSAs) can be used for health care, child care, even parking and transit expenses. If your client is attending school or enrolled in special training, advise them to check if their employer has a qualified educational assistance program; if one is in place, the employer can pay up to $5,250 for tuition, fees, books and other supplies without the income being taxable to your client.
- Maximize personal deductions--While a standard deduction dollar amount is available to everyone who does not itemize, you should advise your client to calculate whether itemization of the applicable deductions would be more beneficial than the standard deduction. Schedule A of the 1040 tax form includes a variety of popular deductions for expenses such as health care, state and local taxes, mortgage interest, charitable donations, property taxes, and other specialized costs, such as home office, job hunting, and moving expenses. Even sales tax can be deducted with the proper documentation.
- Maximize tax advantages of retirement accounts--If your financial planning client is an employee, advise them to maximize their contributions to their 401k and IRA accounts, if they have them. This action reduces their taxable income and accelerates the growth of their retirement funds.
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