Tax season is overwhelming, as it often feels like we’re navigating a labyrinth of paperwork and regulations. That’s why this episode of The Agent of Wealth Podcast is dedicated to preparing for a successful tax season. As host Marc Bautis explores the nuances of tax preparation, he covers three comprehensive guides aimed at serving as your go-to resources during this tax season. Whether you’re looking to maximize your tax return or for guidance on streamlining the process, tune in to this episode for valuable insights.
In this episode, you will learn:
- What documents to gather before filing your taxes.
- What Adjusted Gross Income is.
- What Modified Adjusted Gross Income is.
- How MAGI and AGI affect your taxes.
- How to determine if you can make a deductible IRA contribution.
- Questions you should ask your accountant at tax time.
- And more!
Checklist: Documents to Collect For Filing 2023 Tax Returns | Flowchart: Can I Make a Deductible IRA Contribution? | Guide: How AGI and MAGI Affect Your Taxes | Bautis Financial: 8 Hillside Ave, Suite LL1 Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call
Disclosure: The transcript below has been lightly edited for clarity and content. It is not a direct transcription of the full conversation, which can be listened to above.
As we enter February, tax season is in full swing. Today, we’ll discuss steps you can take to maximize your tax return preparation and make the most out of your meeting with your accountant.
What Documents to Gather Before Filing Taxes
We recently published a couple of guides that will assist you during tax season. The first covers the essential documents needed for your tax return, categorized into income, deductions, and credits.
For individuals who are employees, it’s typically straightforward with a W-2 and, if applicable, forms like 3921 or 3922 for equity compensation. However, many employees overlook 1099 forms, which are crucial for those with self-employment income, taxable accounts, interest-bearing accounts, retirement plan withdrawals, insurance policy actions, home sales, or other real estate transactions in the year.
Self-employed individuals should compile documentation for deductible expenses, track retirement plan contributions, and gather proof for IRA contributions, with a reminder that Form 5498 is not filed or generated by the taxpayer, but by the IRA trustee by May 31.
Deductions should include documentation for charitable donations, medical expenses exceeding 7.5% of your AGI, state or local taxes, mortgage interest, home equity loans, student loan interest, and alimony paid, depending on whether you itemize or take the standard deduction.
Tax Credit Documentation
To take advantage of tax credits, collect documentation establishing dependency status, qualifying education expenses (1098-T or 1099-Q), information about electric vehicle purchases, energy-efficient home improvements, and details about estimated tax payments.
How to Determine If You Can Make a Deductible IRA Contribution
One of the few things you can do to improve your tax situation after December 31st is make an IRA contribution, but there are rules around whether your IRA contribution will be tax deductible.
To help make this determination analysis, we created a guide that addresses common factors affecting eligibility rules for traditional IRAs, including:
- Earned income
- Coverage under an employer plan
- Other (Roth) IRA contributions
- Filing status-based MAGI thresholds
In order to be eligible for the deduction, the first requirement is that you have earned income. Next, you need to determine if you’ve already made a contribution to a Roth IRA. You can make a contribution of a combined $6,500 ($7,500 if you’re over 50), to your Roth and Traditional IRA each year.
The next determination depends on tax filing statuses, whether you are covered by an employer-sponsored plan, and your Modified Adjusted Gross Income (MAGI).
- If you’re a single filer and an active participant in an employer-sponsored plan, and your MAGI is over $83,000, you cannot make a deductible IRA contribution.
- If you’re a single filer and not an active participant in an employer-sponsored plan, you can make a deductible IRA contribution.
Married Filing Jointly
- If you’re married filing jointly and are an active participant in an employer-sponsored plan, and your MAGI is over $136,000, you cannot make a deductible IRA contribution.
- If you’re married filing jointly and not an active participant in an employer-sponsored plan, but your spouse is, and your MAGI is over $228,000, you cannot make a deductible IRA contribution.
- If you’re married filing jointly and you nor your spouse is covered by an employer-sponsored plan, you can make a deductible IRA contribution.
How AGI and MAGI Affect Your Taxes
MAGI and AGI play a significant role in your taxes – beyond just IRA contributions – affecting deductions, credits, and eligibility for certain retirement plans.
Adjusted Gross Income, Explained
Your Adjusted Gross Income (AGI) consists of the total amount of income and earnings you made for the tax year (from your job, self-employment, dividends and interest) minus certain adjustments to income. The deductions you’re able to take determine what tax bracket you’re in. Those adjustments to income include:
- Educator expenses (books, supplies, equipment).
- Certain business expenses.
- Deductible HSA contributions.
- Moving expenses for military members.
- Deductible self-employment taxes.
- Contributions to retirement plans (e.g., SEP, SIMPLE) or health insurance for self-employed people.
- Penalties on early withdrawals of savings.
- Alimony paid.
- Deductible IRA contributions.
- Student loan interest.
- Deductible tuition and fees.
For tax year 2023, your AGI is on Line 11 on Form 1040.
Modified Adjusted Gross Income, Explained
Modified Adjusted Gross Income (MAGI) in the simplest terms is your Adjusted Gross Income (AGI) plus a few items that get added back. Some of those add backs include:
- Tax exempt Interest.
- 50% of Social Security benefits.
- IRA deductions.
- Student loan interest deduction.
MAGI is used to determine your eligibility for certain deductions, credits and ability to contribute to certain retirement plans. MAGI affects:
- Medicare premium surcharge.
- Whether or not you’re subject to the 3.8% net investment income tax.
- Eligibility for Roth IRA contributions.
- Child tax credit.
- Clean vehicle credits.
- IRA contribution deductibility.
Questions to Ask Your Accountant at Tax Time
As you prepare to meet your accountant in the coming weeks, consider asking them these questions, which can help improve your tax situation this year.
- What will my marginal tax bracket be in the upcoming year?
- Can you help estimate my income for this year?
- Do I have any remaining loss carryforwards going into this year?
- How would a Roth conversion impact my income?
- Should I increase my retirement plan contributions?
- Should I change my tax withholding?
- Would it make sense to bunch my deductions this year?
- How can I optimize earnings for my children?
While these are all good things to discuss with your accountant, our advisors are also happy to discuss them with you.
Understanding tax laws isn’t easy, especially since the laws constantly change, and are often tricky. Attempting to take advantage of the benefits can be a confusing process. Though there are some great tips and explanations here, we recommend you seek the assistance of a tax
professional when you have any questions about your tax situation.
If you have any questions about your tax situation, you can schedule a 1-on-1 consultation with our team of financial advisors using the link below.