As you meet with your CPA this tax season, I suggest you give them the following list of questions. Some CPAs may be too busy to do comprehensive tax projections as part of the tax-preparation appointment, but that should not preclude you from asking the following:
1. Will a life event or major purchase affect my taxes?
Tell your CPA about any births, adoptions, marriages, separations, divorces or deaths. Have your children reached a milestone like 18 or 21? Have they left school and started jobs, possibly changing their deductibility status?
Death in the family is especially important: Does an inheritance trigger a federal or state estate tax? If an inheritance includes an IRA or 401(k), the tax rules are strict, and failure to properly manage the inheritance could have major tax consequences.
2. What will my tax bracket be in 2015?
A tax bracket is the rate at which the last dollar of income will be taxed. Knowing your tax bracket can help me calculate the tax efficiency of various investment or financial planning proposals.
3. Can you help me estimate my income for 2015?
Go beyond salary. Bonuses, freelance assignments, investment income, alimony, winnings, and more all play a role. And it’s not enough to know gross income. It’s also important to have an estimate of adjusted gross income, modifications to adjusted gross income, and taxable income. Each of these types of income is dependent on various deductions or credits that need to be estimated in order to come up with projections for the new year.
4. Do I have any remaining loss carryforwards going into 2015?
Loss carryforwards are tax losses as a result of selling investments at a loss. The IRS only permits deducting investment losses to the extent that they are offset by gains of up to $3,000 a year. Any losses in excess of this can be carried forward to future tax years, hence the name “loss carryforwards.”
5. Am I eligable for a Roth conversion? Is it recommended?
A Roth IRA conversion allows workers to convert traditional IRA assets to a Roth to avoid taking required minimum distributions in retirement and avoid paying tax on any distributions taken. A Roth conversion also involves paying taxes on the assets converted, since contributions to traditional IRAs are made on a tax-deferred basis. A CPA can estimate the tax that would be due on a Roth IRA conversion.
The CPA is likely to have an opinion on whether a Roth conversion is a good idea or not.
6. Should I increase my retirement plan contributions?
The IRS has increased the contribution amounts for some types of retirement plans in 2015, so there’s incentive for making contribution increases.
7. Do you have any recommendations for reducing my 2015 taxes? What about 2016 and beyond?
CPAs can recommend a number of strategies that might help reduce tax liability in the future.
8. Should I change my tax withholding for 2015?
Various situations may mean that you need to change the amount you withhold from your paycheck. If you’ve gotten married, divorced, or had a baby, you’ll need to make changes on your W-4 form. Also, if you’ve been getting large tax refunds, it may make sense to increase the number of exemptions you take on the W-4 to match up what you pay with your actual tax obligation.
9. Is there anything my financial advisor can do to help my tax situation?
There’s a close relationship between financial planning and taxes. That’s why it’s good for you to ask this question of your CPA and then pass the answer back to me. The better informed I am, the more effective I can be in planning and managing your investment and financial affairs.