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Three Important Tax Preparation Tips

By Chris Risenmay, CFP®

February 2017

We are more than a month into the new year, and that means taxes are on everyone’s mind. Many people wait until the end of the year to find ways to minimize their tax bill, but why wait? If you take a proactive approach and implement strategies to lower your annual tax bill at the beginning of the year, you won’t be scrambling come December.

Since your tax bill is based on your taxable income, one of the easiest ways to reduce your tax bill is to reduce your income number. There are multiple ways to accomplish this, such as giving wisely, maximizing retirement accounts, and contributing to a Health Savings Account.

Give Wisely

In 2015 alone, Americans gave $373.25 billion to charities. Though most people make charitable donations because they want to give back to the community, there are also tax benefits for such generosity.

If you itemize deductions when filing your taxes, all charitable giving to qualified organizations can be included, whether cash, goods, or securities, subject to the IRS’ charitable contribution deduction limits. Because of this, the more you give, the lower your taxable income and final tax bill generally will be. You will need records of your giving, either through receipts from the charities, canceled checks, or credit card statements. If the IRS ever audits you, you will need this paperwork to back up the deductions on your tax forms.

While charitable giving in the form of cash and goods is generally beneficial for reducing how much you will owe in taxes, there is an additional benefit for those who donate appreciated securities. If you’ve owned a security for more than one year, you can deduct the full fair market value of the security on the date of the gift. In this way, both you and the charity avoid paying capital gains on the appreciation. 

Not all charities accept donations of securities, but that shouldn’t limit your giving. You have the option to open a donor-advised fund that will sell the securities and leave you with cash to donate as you wish. You will still receive the tax benefit that goes along with selling the securities while also having cash to give to the charity of your choice. Keep in mind that it isn’t a good idea to donate securities that have experienced losses. It is better to sell these securities yourself, claim the loss on your taxes, then donate the proceeds. (Please consult your accountant for tax advice on your specific situation.)

Max Out Your Retirement Savings

Your greatest opportunity to lower your taxable income comes from tax-deferred retirement accounts. If your employer offers a 401(k), you can contribute up to $18,000 in 2017. If you are over 50, you can also take advantage of catch-up contributions of an additional $6,000. By maxing out your 401(k), you have a potential $24,000 less taxable income.

Because 401(k)s are only offered through employers, not everyone has the chance to contribute to these accounts. However, everyone with an income can contribute to an IRA. In fact, you don’t even have to have an income to be eligible! If you are married and your spouse earns an income, you can save through an IRA as well, subject to IRS contribution limits. IRA contribution limits for 2017 are $5,500 per person, with an additional $1,000 for those over 50.

If you take advantage of both types of retirement accounts, you can reduce your taxable income by $23,500, or $30,500 if you are over 50. That means your tax bill is reduced by $6,580 or $8,540 respectively, if you are in the 28% tax bracket.

Open a Health Savings Account

An underused yet highly tax-advantaged governmental savings vehicle is the Health Savings Account (HSA). Contributions to HSAs are not taxable, and they grow tax-free as well. The one downside is that they are only available to people with high-deductible health plans.

The 2017 contribution limits for HSAs are $3,400 for an individual or $6,750 for a family. You can also make a $1,000 catch-up contribution if you are over 55. HSAs roll over from year to year, so you don’t have a deadline for using the funds. You can even invest the funds and build up your HSA to use during your retirement years. All the money in the account must be used for qualified medical expenses, or there will be penalties. 

How Cypress Wealth Services Can Help

Tax-reduction methods are an incredible opportunity to save you money, but they can take some amount of planning to implement. If you are interested in utilizing any of these methods but don’t feel that you have the knowledge to do so, let us help. As experienced financial professionals, we can help you set up an IRA or donor-advised fund or help you determine if you are eligible for an HSA. We can also teach you about other tax-reduction methods such as tax loss harvesting, claiming other applicable tax deductions, or timing investment or real estate decisions properly. Call our office at 866.888.6563 so we can help keep your hard-earned money in your hands.

About Cypress Wealth Services

Cypress Wealth Services, an independent RIA firm providing financial planning and investment management to high net worth individuals, families, business owners, and institutions. Cypress Wealth Services is a team of professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services is uniquely qualified to serve a broad range of client needs. Their experience and expertise act as a foundation for their client service process, The Second Growth, which focuses on efficiently protecting, growing, and transferring to their loved ones the wealth and legacy a person has already built. With offices in Palm Desert, and Anchorage, the firm serves clients across the country. Learn more by visiting