Tax Tips

Published in the Florida Keys newspaper, “The Keynoter”


Happy April 15, everybody!

By now, you’ve probably got a pretty good idea which of the four basic tax scenarios you fall in.

1)   “I filed for an extension.” As long as you didn’t do it in a panic because you couldn’t face the garbage bags full of receipts, and you made the proper tax prepayment, this is fine. Just remember that filing for an extension in April doesn’t mean you don’t have to pay in April.

2)    “I wrote a big check.” You should consider making some adjustments to your withholding (if you’re an employee) or to your quarterly estimated tax payments (if you’re self‐employed). You probably don’t want to pay-in again. (Though, there is one scenario in which you can take a little pleasure in writing a big check: It could mean you made way more money than you expected to this year, or had an unanticipated windfall. It’s a reach, but if you write a big check you have to find a bright side where you can.)

3)    “I received a big refund.” Believe it or not, this is something to avoid, too. You don’t want a big refund, especially if you’re doing something like carrying debt. Any tax withheld that you receive back at the end of the tax year is equivalent to an interest‐free loan to the US Government. If you’re carrying $5,000 on a credit card at 15 percent, and you get $5,000 back from the IRS and pay the credit card off, you lost some money on that deal. Talk to a tax professional about adjusting your withholding amount. That money should have been in your paycheck, not Uncle Sam’s pocket.

4)   “My withholding was set up correctly.” This, to me, means you had to write a check for less than $1,000, or received a small refund. That’s a reasonable margin of error, especially if you have a steady paycheck. It’s a little more complicated for the self‐employed among us; there, I would urge you to pay quarterly estimated taxes, to err on the side of a refund, and to consult a professional tax preparer and a professional tax planner.

The new “Making Work Pay” credit will go to most employees in the form of reduced withholding on their paycheck, which may have implications for people who claim “Married” on their Form W-4 or for those who have multiple jobs. Unlike prior stimulus payments, eligible taxpayers must claim the Making Work Pay credit on their 2009 and 2010 tax returns in order to reduce their overall tax bill for each year.

It is possible for married spouses to have underwithholding if spouses both claim “Married” on their Form W-4, and each spouse has withholding for the year reduced by $800. So, as a couple they qualify for an $800 credit, but their withholding was reduced by a combined $1,600. The couple may owe more tax or receive a smaller refund. For that reason, one or both spouses may want to submit a new Form W-4 to ensure there is enough withholding to cover the tax on the combined income.

A financial advisor may help plan to reduce your tax burden in the years to come. And speaking of that, let’s talk for a moment about tax‐deferred retirement plans. There are several different ways to save pre-tax dollars for your retirement. For large companies – more than 100 employees – there is a 401(k). Non‐profit organizations have an equivalent, the 403(b). Small business and the self‐employed can use a SIMPLE IRA plan, a SEP, an IRA plan or an individual IRA.

Employees of a 401(k) or 403(b) may make salary deferral contributions up to $15,500, if the plan allows. Employees age 50 or older may make additional catch-up contributions of $5,500. The salary deferral limit for a SIMPLE IRA is $11,500. The catch-up contribution limit for a SIMPLE IRA is $2,500. The contribution limit for a SEP-IRA (not including a SARSEP) is generally the lesser of 25 percent of eligible compensation or $49,000. The contribution limit for an individual IRA is $5,000. The catch-up contribution limit for an individual IRA is $1,000. The limit for Roth IRA contributions is limited by a person’s modified adjusted gross income.

I know the idea of putting money into the stock and bond market may be a little scary right now. Take a deep breath and remember that when it comes to retirement savings, you are in this for the long term. While past performance is no guarantee of future results, the market has always recovered before. Saving in a tax-deferred plan now may help position you to take advantage of a recovery in the years to come. Plus, you may reduce your tax bill, and that’s always good to hear, especially in April.

Emily Brouilette is a financial advisor and Certified Financial Planner™ practitioner with Ameriprise Financial.  Her office is located at 422 Fleming, #15, in Key West.  Contact Emily at (305) 394-5715 or for more information.