Five Essential Tips for Arizona Residents this Tax Season
It’s everyone’s favorite time of year. Spring training, march madness, and of course, tax season! Sure, we get it, one of those items may not be as exciting as the other two, but as a law firm that specializes in estate and tax planning, we’re here to help.
For starters, everyone has to pay taxes. As Benjamin Franklin famously quipped, “In this world nothing can be said to be certain, except death and taxes.” That said, remember that you don’t have a duty to pay any more than you legally owe the government.
In fact, the right of citizens to minimize their tax obligations is enshrined in federal case law. Writing for the United States Second Court of Appeals, the esteemed Justice Learned Hand proclaimed “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” – Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934) (emphasis added).
With all that in mind, here are our top five tips for reducing your tax bill this season:
- Max out your Traditional IRA, and remember to do it soon!
You have until April 18, 2017 to contribute up to $5,500 ($6,500 if you’re 50+) to a traditional or Roth IRA for 2016. Though it is best to maximize the amount of money you put into tax-advantaged retirement accounts, putting income into an IRA this late in the tax season can be a bad habit. The earlier in the year you add funds into an IRA, the more time your investment has to grow tax free.
- Pick Traditional IRAs over Roth IRAs
If you are eligible to invest in Traditional & Roth IRAs, you also have the right to convert from a Traditional to a Roth IRA at some point in the account’s life. Because income tax rates are expected to fall in the coming years, it probably will not be advantageous to pay taxes on your retirement income now. Of course, if you expect to be in a significantly higher tax bracket at retirement, a Roth IRA is still your best bet.
- The sooner you take your deductions, the better
Tax reform will be a core part of the Republican controlled Congress’ legislative agenda this term, meaning income tax rates should fall over the next two years. If you are looking to dump bad investments in order to maximize your deductions, now is the time. While this strategy won’t necessarily help you on your 2016 taxes, it’s still important to act now since higher income households will almost certainly face lower tax rates next year coupled with the near-certain repeal of the Affordable Care Act’s Medicare tax increase on investment income over $200k.
- Donate to an Arizona nonprofit
If you are paying income taxes to the state of Arizona, you may make a limited donation to a Qualifying Charitable Organization up until the day you file taxes that qualifies as a state tax credit. Because the Qualifying Charitable Organizations are 501(c)(3) nonprofits that provide assistance to low income residents or children with a chronic illness or disability, you may further deduct the donation from your federal return the following year. For future reference, if you make this donation early enough (ie. Before December 31st) you can claim both a state tax credit and federal income tax deduction next year, meaning you get to deduct income that would otherwise not have been deductible until the following year in the form of taxes paid to the state. This earlier deduction puts more money in your pockets but is particularly advantageous if income tax rates fall — as they are expected to — or if you expect to be in a lower tax bracket next year.
- Donate to an Arizona School Tuition Organization
Lastly, Arizona taxpayers may similarly make a tax credit eligible donation of $1087 for a single filer or $2173 if filing jointly as a married couple to an Arizona School Tuition Organization (STO). STOs provide k-12 private school scholarships and are also 501(c)(3) nonprofits. Once again you’ll get a state income tax credit this year and a federal income tax deduction on your return next year.
If you have any questions about these or other tax planning strategies, please don’t hesitate to contact us today.
Nick Gunther is an intern at Yaser Ali Law, a current student at Arizona State University, and an aspiring attorney.