4 Opportunities to Improve Your Tax Situation (Both 2016 and 2017)

Welcome to the height of tax season. As you're preparing your taxes for this year, you may be asking yourself: What can you still do to positively impact your 2016 taxes and what inefficiencies may exist that you can improve on in 2017?  Here, you will find 4 ideas that you may consider moving forward to take advantage of programs set up by the Internal Revenue Service (IRS).

1. Contribute to an IRA

The IRS wants you to be responsible for your retirement. One way they incentivize you to do this is to save into tax advantaged accounts like IRA's and 401k's. The downside on these is that you can't take the money out until retirement, age 59.5 (unless you qualify for an exception). This is no big deal if you truly are saving this for retirement. The upside is tax deferred or tax free growth depending on the vehicle you choose to use.  

If you use a pre-tax account (traditional IRA or 401k) you get a tax deduction for the amount of the contribution you make in the year you do it, then when you take the distribution after age 59.5 you pay ordinary income taxes on any distribution*.  

If you use a Roth account (Roth IRA or Roth 401k) you get no tax benefit today, however when you take distributions after age 59.5, you pay no taxes on the distribution**.

Consider me a nerd, but that is pretty awesome! It is so awesome that the IRS limits you on what you can put in to the account on an annual basis. For IRA/401k it is $5,500/$18,000 under age 50 and $6,500/$24,000 over age 50. The great news... you can still contribute for 2016 IRA's up until you file taxes (reach out to us or other advisors-we are happy to help). 

*Distributions prior to age 59.5 involve a 10% penalty plus your normal tax rate.
**You are eligible to take your contributions out of your Roth IRA penalty and tax free at any time. However, in order to take a distribution of the earnings the account must be open for 5 years and you must be over age 59.5 unless you qualify for an exception.

2. Estimate future taxes

Are you going to get a big refund check this year? Don't be fooled that this is a great thing! Instead of that money being held by the government, it could have been working to earn you money in a investment or savings account. If I or someone else as your financial planner got you 0% return on your money you wouldn't be thrilled would you? 

If it's possible to get zero as a tax return, then you have planned well throughout the year. If you could invest that money or at worst have it earn a small amount of interest in your savings account you would be better off than letting the IRS borrow it for free. Consider adjusting your withholdings to arrive at the correct amount to net a near zero return.

3. 529

The government also wants to incentivize you to save for college. One way they do this is by offering 529*** plans through your state. Depending on the state there can be state tax benefits to funding a 529. For Arizona residents the state tax benefit is not a lot, but if you were already planning on doing it and the state says they'll give you a little something it sweetens the pot a little bit!  

Regardless of state, there is a federal tax benefit. Funds in a 529 come out tax free if the funds are used for qualified education expenses.

***Investors should consider the investment objectives, risks, and charges and expenses associated with 529 plans before investing.  More information regarding 529 plans is available in the issuer’s official statement.  Please read the official statement carefully before investing. Investors should also consider, before investing, whether their home state of the home state of the beneficiary offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program.

4. Health Care and Child Care Expenses

Some high deductible health insurance plans offer what is called a health savings account. If you have this your deductible is typically higher on your health insurance than what might be normal, however your premiums typically will be lower. If you have a health savings account you are allowed to put up to $3,400 in as an individual and $6,750 on a family plan. The money goes in pre-tax and comes out tax free if it is used for health care expenses. That is fantastic! It is the most tax efficient account that exists.

If you live in Arizona you have seen some of the highest rate increases on health insurance in the nation. Lucky us right? Self-employed individuals have noticed the most dramatic change in pricing. This has forced some individuals to think outside the box for health coverage and consider health share programs as an alternate to health insurance. There are great health insurance professionals that are Local First members that can help you talk through the options of health coverage. 

Some employers will also offer a dependent care flexible spending account (FSA) where you can save some funds to pay for child care expenses among others. Consult your HR team or accountant to learn more about eligibility of expenses. FSA's are the type of account where if you don’t use it, you lose it so you don't want to over save into an FSA.

If you've stuck with me this far I'd like to give you a big THANK YOU. As I'm writing this I'm thinking to myself "I don't know if anyone will read this besides my wife and colleagues who proofread it. I mean I put the word taxes in the title!!!" I've covered a lot of pieces at a high level and my hope is that it is educational and helpful not overwhelming and paralyzing.  

If you have further questions on any of the topics covered, other personal finance topics, or would like to suggest a topic for a future post please reach out.


Matthew Benson is a Certified Financial Planner™ at Blakely Walters Wealth Management, a Local First AZ member.  Matthew is Dave Ramsey’s SmartVestor™ Pro for Investing and Financial Planning in Phoenix.  He can be reached at 480-776-5866 or mbenson@blakelywalters.com.

The content of this article is not specific investment advice nor does it consider an individual’s specific financial situation. Securities and investment advisory services are offered through NEXT Financial Group, Inc., member FINRA/SIPC. Blakely Walters Wealth Management is not affiliated with NEXT Financial Group, Inc. Working with an investment professional who is part of the Dave Ramsey SmartVestor™ Pro advertising service cannot guarantee investment success or that you will achieve your financial goals.  There can be no assurance that working with a SmartVestor™ Pro will produce better outcomes than working with an advisor not participating in the SmartVestor™ Pro program.  Investment professionals participating in the SmartVestor™ Pro program pay advertising fees to have their name and information disseminated to the investing public via the SmartVestor™ program.  Neither Dave Ramsey Solutions nor the SmartVestor™ Pro program are affiliated with NEXT Financial Group, Inc. and are not sponsored or endorsed by NEXT Financial Group, Inc.