Working with your Retirement Tax Planning Advisor with Tax Awareness
How the Tax Code Works for You
By April 15th this year, millions of US taxpayers will dutifully file their income tax returns. And each one has to make decisions about credits and deductions, with or without advice from a retirement tax planning advisor. Here in Denver, taxpayers need to take time to discover how our tax code works and how to put the tax code to work.
The place to start is with two critical tax concepts – Tax Credits and Income Deductions.
Information from Your Retirement Tax Planning Advisor about Tax Credits
Tax credits are subtracted directly from your tax liability. Your tax bill reduces dollar-for-dollar, reducing your tax burden more than income deductions. Your tax credits likely have phase-out limits, so that’s where your retirement tax planning advisor comes in. Consulting a professional for specific financial information to prepare to take advantage of federal tax credits can substantially reduce your tax liability.
Here are some tax credits you may be eligible for:
- Federal Child Tax Credit is for families with dependent children under the age of 17. There is a maximum credit per qualifying child that depends on your income.
- The American Opportunity Credit is a tax credit for eligible students for tuition to cover four years of post-secondary education.
- The Child and Dependent Care Credit gives a tax credit for those who pay someone to provide care for a child who is 12 years old or under.
Income Deductions – Lower Your Taxable Income
When someone says you can “write that off,” they usually mean that the expense is an income deduction. The deductions are subtracted from your income before you calculate your taxes, so they reduce your taxable income, and hopefully, by extension, your tax liability. Like a tax credit, deductions usually have phase-out limits. So consult a retirement tax planning advisor for information regarding your specific situation.
Here are some examples of income deductions:
- Contributions to qualifying charities are sometimes deductible. You can donate cash, stocks or assets and potentially deduct the fair market value (FMV) of the property you donate. Also, you may be able to write-off your out-of-pocket expenses while working for a charity.
- You may qualify to deduct any mortgage interest you pay on loans secured on your primary or secondary residences.
- You may be able to deduct deposits made to qualified retirement plans, like Individual Retirement Accounts (IRA). Consult with your retirement tax planning advisor for the contribution limit. The limits increase when you turn 50 years old.
- Once you have your 72nd birthday, you need to start taking the required minimum distributions (RMD) from any Traditional Individual Retirement Account (IRA) or another qualified retirement plan you hold. Withdrawals are considered ordinary income when taxed. But if you withdraw funds from your retirement plan before you turn 59½, the funds may be subject to an additional 10% federal income tax penalty.
- You might be able to deduct medical and dental expenses that exceed 10% of your (adjusted) gross income.
Having a solid understanding of credits and deductions provides a critical building block for how the tax code can work better for you. But of course, the information in this article is not tax or legal advice. So consult with a retirement tax planning advisor to make informed financial choices.