Chaz Fahrner, CFP®, EA

Chaz Fahrner, CFP®, EA

Chaz Fahrner is a CERTIFIED FINANCIAL PLANNER™ and Associate Wealth Advisor with The Gensler Group.

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Tax Questions You Should be Asking.

Every year, an estimated 2 million individuals and families overpay their federal income taxes by an average of $440. Regardless of how you feel about taxes, you are still required to pay. However, there is no reason to pay more than what is required. Accountants are extraordinarily busy during tax season and as a result, may overlook opportunities that may reduce your taxes owed. Working with your financial professional and asking these questions, before the end of the year, may help you reduce your tax liability.

Should I defer more into my retirement accounts?

If you are employed, or have a spouse that is employed, one of the easiest ways to reduce your taxes is to contribute more into your pre-tax retirement accounts.Every dollar that you contribute to your retirement account, up to the annual limits, will reduce your taxable income and taxes owed. Confirm with your financial professional that it makes sense to contribute to a pre-tax account versus an after-tax account, as this choice can change your future tax liability substantially.

Do I qualify for any tax credits?

Tax credits are the cream of the crop when it comes to tax savings because they are a dollar-for-dollar reduction from taxes owed. These credits are designed to incentivize taxpayers to accomplish a specific goal that the US Government deems important. If you were involved in any of the following in 2019, you should ask your tax professional if you qualify for a credit:

  • Adopted Children
  • Bought an electric car
  • Installed solar on your home
  • Took educational classes
  • Have children or other dependents lived in your home
  • Saved for retirement
Tax Credits can be very powerful and have huge benefits if you do qualify for one. Ask your financial professional if you are close to a credit. Being close to a credit means your income is close to the income limits or the cut-off that would allow you to take advantage of the credit.

If you are close, ask how you can reduce your income to qualify for the credit.

What is the best way to give to charity and receive a tax benefit?

The Tax Cuts and Jobs Act of 2017 may have changed the tax benefits when donating to your favorite charity. If you are now taking a standard deduction, then you may not be receiving a tax benefit when you give cash to charity. There are a couple of fixes that can help your situation. If you are over age 70, and you have retirement accounts, then you may qualify for a Qualified Charitable Distribution. This donation method will allow you to give your annual required minimum distribution to a charity of your choice directly and also receive a dollar-for-dollar reduction in your income, which will reduce your taxes.

Another strategy is to open a Donor Advised Fund account. These accounts are like a personal foundation; you contribute to the account now, receive the tax benefit in the year you donate, and then you have the luxury of giving to any charity of your choice at any time in the future. A Donor Advised Fund may make sense for you if you regularly give to charity, because you can contribute a lump sum to it this year for your next few years of donations.

Does a Roth Conversion make sense for me?

An often overlooked strategy is a Roth conversion. This strategy may help you transfer your retirement accounts that are taxed 100% as you take money out, to a tax-free retirement account such as a Roth IRA. This is beneficial because, once transferred over to the tax-free account, the investments inside the account will grow tax-free for future needs. A further benefit of a Roth Conversion is that Roth accounts aren’t subject to RMDs (forced taxable distribution from your retirement accounts), allowing you to keep your assets growing tax-free until you need them or until you pass them to your heirs. This strategy may be a great option if you are retired and have low taxes. It also makes sense if you are in a sabbatical year or college and have lower than normal income for the year. This strategy is not for everyone so consult with your financial professional to determine if they may be a good fit for you.

As Benjamin Franklin said, “Nothing can be said to be certain, except death and taxes.” This may be true, but as long as we are intentional and follow rational tax advice from a professional, we can accept the certainties of life with a bit more grace. 

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