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3 Questions to Ask Your Accountant

By Taxes Consumer Reports

A version of this article appeared in the October 2014 Consumer Reports Money Adviser.

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If you want to save money on the income taxes you pay next tax season, set up an appointment before year-end with your accountant or enrolled agent. These professionals are gearing up for next year's tax season, but they have time now in their schedules to really focus on your current and future tax situation. Below are three queries to get the conversation started.

When it comes to filing taxes, the most important date isn’t April 15; it’s Dec. 31, because the government measures how much profit you made over the course of a calendar year. When the calendar year is over, there’s not much you can do other than funding an IRA (which you can do until April 15 of the following year). The key to reducing tax liability is the steps you take during the calendar year. If you’re an employee, you should review the pretax benefits that your company offers, such as paying for child-care costs with pretax dollars. And, of course, fully fund your 401(k) or 403(b), says John Vento, a certified public accountant based in Staten Island, N.Y., and author of “Financial Independence (Getting to Point X): An Advisor’s Guide to Comprehensive Wealth Management” (Wiley, 2013). “Every pretax dollar you put away is a tax savings because you’re not paying the government up front and are getting the benefits of tax deferral,” he says. 

Not all investment gains are treated equally. Short-term capital gains from stocks that you’ve held for one year or less are taxed at the same rate as ordinary income—up to 39.6 percent, depending on your total taxable income. Hang on to those stocks for at least a year, though, and any profits will be taxed at a long-term capital gains rate: 15 percent in federal taxes for most taxpayers. (State taxes take an additional bite.) If, however, you’re in an income tax bracket of 15 percent or less, as is the case for many retirees, you pay zero in long-term capital gains. “You want your income to be qualified dividends (i.e., those subject to capital gains taxes) and capital gains,” says Jeffrey Baum, a certified public accountant in New York City. “There’s no tax downside for that.”

Learn how to save time and money in tax planning and preparation with the Consumer Reports Tax Center.

First, project the amount you might have in your IRA when you reach 70½ and calculate the Required Minimum Distribution. (Bankrate.com has a good tool.) One way to reduce your RMD—and associated taxes—is to delay taking Social Security benefits until age 70 and withdraw from your IRA instead. Every year you delay taking Social Security, your benefits increase 8 percent—possibly more than the returns in your IRA portfolio. In any case, there may be no need to fear getting hit with higher tax rates. The tax brackets are wider than many people realize. For married couples filing jointly, the 15 percent tax bracket is between $18,150 and $73,800; the 25 percent bracket applies to income between $73,800 and $148,850. When you move into a higher tax bracket, only the additional income is taxed at a higher rate.

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