By Mike Bohigian, CPA
As we approach the final stretches of tax season and the looming April 18th filing deadline, we wanted to share some observations from the past couple months working with our clients.
One general observation we’ve had as a firm is the interesting way in which tax information is circulated throughout the professional community. The cycle appears to go something like this:
- First, Congress enacts new tax laws and provisions.
- In the first year or two after these tax changes occur, the accounting profession must learn the myriad rules and how to process any accompanying tax documents, and then learn how to educate their clients on the tax implications for these new rules.
- This begins a period of adaption for both accountants and clients, as tax strategies are developed to suit everyone’s individual circumstances.
- Eventually, after a period of four or five years, we all get the hang of it.
- And then invariably Congress passes new tax laws and the learning curve starts all over again.
A good example of this educational cycle is the Roth conversion. A Roth conversion is simply a conversion of a traditional IRA into a Roth IRA, also known as a “Backdoor Roth”. Prior to 2010, Congress had imposed strict income limits on a person’s ability to convert a traditional IRA into a Roth. In 2010, however, they lifted these income limits, allowing anybody to make a conversion. While some of our clients took advantage of the law in the early years after its enactment, we have noticed a huge upsurge in the number of our clients who have made Roth conversions in the past couple years. For these clients, making a traditional non-deductible IRA contribution and then immediately converting this to a Roth IRA has become almost second nature.
Of course, we still do encounter questions and confusion about Roth conversions, and a Roth conversion isn’t the right strategy for everyone. Taxpayers must be wary of the dreaded “cream in the coffee” problem in which a Roth conversion can become taxable by the percentage that a person has money in pre-tax IRA accounts, including SEP IRAs. For this reason, we tell clients to check with us before making a Roth conversion for the first time.
Another trend we have recently noticed is the uptick in the number of clients with Health Savings Accounts (HSAs). With the rising cost of health care, many employers are offering high-deductible health care plans with an accompanying Health Savings Account and making contributions into the HSA on behalf of their employees. For anyone who enjoys studying the fine art of the W2, the code W with a dollar amount is the earmarked contribution into an HSA.
One point worth making is that although we are now in 2017, someone who has not maxed out their HSA can still contribute additional funds into their account, allocate this money toward 2016, and deduct the contribution on their 2016 tax return up until the deadline of the tax return. For 2016, the maximum for individuals is $3,350 and for families is $6,750, with a $1,000 catch-up for anyone age 55 or older. In 2017, the maximum for individuals will increase to $3,400.
While it may be too late to make an additional HSA contribution for 2016 if you’ve already filed your tax return, it is good information to have for the future; a future that will last as indefinitely as the new tax laws that come down the pike, and then the circulation of new information will begin again.