When it comes to getting your financial house in order, there are a number of things you can do to get organized. It’s even better when you can find opportunities and strategies to save on taxes while doing so. Here are 13 items for your financial to-do list:
1. Be sure you’re maxing out your contributions to your employer-sponsored retirement plan. Doing so will help reduce your taxable income, which in turn will reduce your taxes.
2. If you are in the 10% or 15% ordinary income tax brackets, then you are simultaneously in a 0% long-term capital gains (LTCG) tax bracket. This gives you the opportunity to sell investment assets with LTCG without taxes for the part of the gain that lands in the 15% bracket.
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For example, the upper limit of the 15% marginal bracket for 2016 is $75,300, if you are married and filing jointly. Now let’s say Jim and Linda have taxable income in 2016 of $50,000. Subtracting $50,000 from that upper limit equals $25,300. This means if Jim and Linda have a common stock (not held in qualified accounts) with a LTCG of $25,300, they can sell it and pay no tax.
3. Consider shifting income from investments that generate taxable interest, such as taxable corporate bonds or bank certificates of deposit to investments that generate tax-exempt interest, such as tax-free municipal bonds, as a way to reduce taxes.
4. It may make sense to get more of your money in stocks that pay qualified dividends, which are taxed more favorably than regular dividends. Qualified dividends are taxed at capital gain rates. Again, if you are in the 10% or 15% marginal tax bracket, the LTCG rate is 0%. If you are in the top 39.6% bracket, then your LTCG rate is 20%. All the other brackets fall into the 15% LTCG rate.
To be considered qualified, according to the IRS, qualified dividends are dividends paid during the tax year from domestic corporations and qualified foreign corporations. This generally refers to common stocks. You also can check dividends on your tax return by looking at lines 9a and 9b (ordinary and qualified dividends, respectively).
5. Check to make sure the right investments are held in the right account to gain a tax advantage. Generally it is better to hold bonds that generate interest subject to the higher ordinary income tax rates inside an individual retirement account. Holding stocks that generate qualified income are better off in taxable accounts because of the more favorable tax treatment of qualified dividends.
6. For those that are eligible for the tax deduction, check to make sure you have made an IRA contribution for 2015. This could be an easy way to get a $5,500 tax deduction, or a $6,500 deduction for those age 50 or older. You still have until April 18, 2016, to make this contribution for 2015.
7. For those that turned age 70½ last year, the required beginning date for your first required minimum distribution is April 1, 2016, plus you will have to take the normal required distribution for 2016 by December 31. Failure to do so can result in a 50% tax penalty. This possible double required distribution applies only to your first year distribution. All following RMDs need to be removed by December 31 of each year.
8. Consolidating accounts whenever feasible can help reduce the amount of statements and other paperwork you receive. If you have multiple IRAs for example, you could consider combining all of your traditional IRAs into one account and all your Roth IRAs into one account.
9. You should also double-check the beneficiaries on your IRAs to be sure they are up to date.
10. Along the subject of IRAs, with the new rollover rule now in effect, be very careful not to do more than one 60-day rollover in a 12-month period that begins on the date you receive the funds from the rollover. We are now limited to only one of these types of rollovers every 12 months regardless of how many different IRA accounts you have.
11. Be sure to meet with your insurance agent at least every five years, or as needed, to review your life and health insurance, and property and casualty insurance, and be sure life insurance beneficiaries are up to date.
12. Your estate plan should be reviewed with your attorney at least every five years, or as needed, especially in the case of changes due to divorce, marriage, a death, change in assets or if you’ve moved.
13. Finally, keep financial records as long as appropriate either electronically or by a hard copy. Household bills should be kept at least a year. Things like tax returns, bank and investment statements, cancelled checks, sales receipts and paid-off loans should be kept six or seven years. And for the long term, keep things like medical history information, retirement plan documents and Social Security information.
Good luck with your spring cleaning.
Mike Piershale, ChFC, is president of Piershale Financial Group in Crystal Lake, Illinois. He works directly with clients on retirement and estate planning, portfolio management and insurance needs.
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