Also consider these for your tax year preparation

Death and taxes are the two inevitable yet constant factors in our lives. On that comforting note, let us talk about the less depressing of the two - taxes. There, don’t you feel better about taxes already? Even if you don’t, tax season is upon us and it pays, financially and stress level wise, to be prepared. Here are some topics for this tax season that you should be considering and discussing with your qualified tax professional.

Contribute to a ROTH IRA

ROTH IRA’s are a relatively recent option and a good one. They do not have the RMD (Required Minimum Distribution) requirements at age 70 ½ and the gains are tax free. They do have a penalty of 10% if you tap into them before age 59 ½. If you are under age 50, you can contribute up to $6,000 for the year. Over age 50, you have a $1000 catch up taking that number to $7,000 for the year. You will need to have earned income for the year to qualify and after a certain income level (around $195,000 for married filing jointly), you cannot qualify for a ROTH.

 Important note: If you are married filing jointly and if your spouse is not working, he/she should still qualify for the ROTH contribution. Many people wrongly assume that a ROTH contribute cannot be made for the non-working spouse. You have until April 15th to contribute for the 2018 tax year.

Qualified Business Income (QBI)

Thanks to the new tax law business owners (depending on the situation) can deduct up to 20% of their income, starting the 2018 tax year. If you have Form 1099 income, either as a sole proprietorship or corporation, make sure that you are aware of this new deduction. Income levels over $315,000 may not qualify. This deduction is in addition to the other Schedule C business deductions, SEP-IRA and standard deductions. As a consultant, contractor or small business owner, you definitely want to know about this relatively new deduction.

 Charitable contributions

Qualified Charitable Distribution (QCD): If you are over age 70 ½, the QCD may give not one but two tax benefits when the amount is from your IRA or other qualified account. One, it may reduce your taxable income based on the contribution, and two, it could also be accounted as part of your RMD (Required Minimum Distribution) calculation. At age 72, the IRS mandates that you start taking about 3.6% of your qualified (tax deferred) funds. The QCD amount is limited to $100,000 annually to any qualified charity and is excluded from your adjusted gross income, while you still benefit from a full standard deduction.

Donor Advised Funds (DAF): A DAF allows you to make a lump-sum donation to take advantage of the up-front charitable tax deduction in a current year. Individuals can take an immediate tax deduction against the full amount they contribute to a donor-advised fund, but there are no rules or regulations about how quickly the money actually has to be distributed. The DAF gives the flexibility to spread the gift out over time.

Note: This write-up is for educational purposes only and should not be considered financial or tax advice. For questions, please reach out to Arvind Ven: 408.725.7122 or arvind.ven@lpl.com.