Tax tips to consider before filing your return

As we approach another season of filing income tax returns, do you feel confident? Are you anxious about the whole process?

It’s understandable that tax time can be stressful. It compels you to examine the year’s finances and devise (or revise) strategies that are designed to help minimize the tax you pay. It also puts your organizational skills to the test as you try to keep track of all your forms, financial statements, tax slips and more.

To help you get over the tax-filing hump, it doesn’t hurt to have a tax expert in your corner. Doug Neal is Tax Principal at CPA firm Windham Brannon, based in Atlanta. He has more than 15 years of experience in tax compliance and planning for top executives and other high net worth individuals.

While your CI Wealth Advisor and tax professional understand your specific financial circumstances and can create a customized plan to help minimize your taxes owing, Neal shares a few generic tax tips to consider.

Consult your tax experts

This tip may appear obvious, but many people don’t engage their tax experts early enough in the process. As well, some will try to prepare their tax returns without professional help and may find they’ve failed to implement tax-reduction strategies or missed certain credits and other tax breaks.

A tax professional can work with you throughout the year to address your tax circumstances and help you set aside enough money at regular intervals, so when it’s time to pay your taxes in April, you can make your full payment and not incur interest charges.

“It’s crucial to discuss taxes with your tax professional on a regular basis,” says Neal. “The sooner they know about specific financial conditions you’re facing, the sooner they can prepare you for what your cash outlay might be at tax time.”

Keeping your tax expert informed is especially important if there’s a significant one-time event like a year-end company bonus being increased or if you triggered large capital gains in your investment portfolio. Maybe you sold your business, and the proceeds were substantial.

“Those things could generate a sizeable tax or alert you to a sizeable tax due,” says Neal. “I’ve had clients who enjoyed a one-off financial boon, and we immediately inputted the high-level numbers using projection software. This way, the client is prepared to write the check in April. We never want to deliver the news on April 14 that the client needs to write a massive check. The sooner we’re made aware of key information, the better we can plan for the imminent tax liability.”

Charitable giving

Providing financial support to your favorite charitable causes is the ultimate win-win situation. You get to help people in need in a very tangible way, plus you gain a tax benefit that will help the bottom line when filing your next tax return.

“Charitable giving remains one of the biggest and best itemized tax deductions available today,” says Neal. “If you’re looking for a sophisticated giving strategy with significant and immediate tax benefits, consider a donor-advised fund.”

With a donor-advised fund (DAF), you’re pre-funding your charitable endeavors. You set aside money now that’s earmarked for charities over the next several years while accelerating the accompanying tax deduction for the current tax year. This way, you can put yourself in a better position to help offset specific large tax obligations you may have incurred this year, reducing your overall taxes owing.

“Think of a DAF as a ‘mini foundation’ without all the administrative hassles,” says Neal. “You make a one-time gift, but the cash in the DAF is invested and has an opportunity to grow. You decide which charities you want to support, and the money is released to these charities over time.”

Utilize your payroll benefits

Neal has found that many people neglect to make full use of their company’s payroll-related benefits. The health savings account, flexible spending account (FSA) and dependent care benefits exclusion are three of the more common payroll benefits you should maximize in accordance with your particular needs and circumstances.

“These valuable company perks can add up and save you a lot of money in tax-free benefits,” says Neal. “For instance, a decent FSA contribution to use for medical expenses could save you hundreds of dollars.”

Backdoor Roth IRAs

Neal also suggests that you consider, in addition to your 401(k), whether making a deductible or non-deductible IRA contribution makes sense for you. If you don’t already have an existing IRA and your income levels are too high, you can still execute a “backdoor Roth IRA” by contributing to a traditional IRA and then rolling it over to a Roth IRA a few days later.

This legitimate tax strategy can help you set aside $6,000 a year ($12,000 for a couple) into an account that grows tax-free. For tax year 2023, those figures rise to $6,500 and $13,000, respectively. If you’re over the age of 50, you can actually contribute an additional $1,000 per individual annually.¹ Since it’s a Roth IRA, there’s no tax impact when you withdraw the funds.

“If a younger couple puts aside the annual maximum for many years, those contributions and any capital appreciation will result in a significant amount with no tax impact when withdrawn,” says Neal. “Money moved from a taxable account into a Roth IRA is invested the same way but converts from a taxable to a tax-free account. Provided you generate enough income, you could put money into a 401(k) and a traditional IRA or Roth IRA in the same year.”

Since the backdoor Roth IRA is a sophisticated strategy for high-income earners, consult your CI Wealth Advisor and tax specialist to see if it’s suitable for you. You’ll also be well served by getting professional advice regarding DAFs and other tax-mitigation tactics. With a sound plan in place and financial experts offering their support, you should find that tax season isn’t something to dread after all.

¹ https://www.forbes.com/advisor/retirement/ira-contribution-limits/

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