Write a letter to the Smith's discussing the results of their tax return, remind them of any deduction substantiation rules they need to follow (receipts, mileage log, etc.), offer suggestions for future tax planning (retirement planning, tax implications of impending birth of child, college fund for new child, etc.).
Answer:
Pension plans are one of the most common strategies to pay less income tax statement. The tax benefits of pension plans is positive at the time of investing, but not so much when recovering the money.In addition to assistance when the time comes for retirement, the taxation of pension plans makes them an element to
take into account when making our tax planning. Its main advantage is that the contributions are subject to rebate (Ricardo, 2016).
Taxation of pension plans
On the contrary, they have tax disadvantages at the time of computation recovery, that is, when recovering the money, and a limitation to the cases in which you can recover the money. When dealing with pension in different years, it is important to differentiate taxation from pension plans between the time of investment and the subsequent recovery of money once retired (Ricardo, 2016).
Taxation of contributions to the pension plan
Pension plans allow us to pay less taxes on 2015 income for the investments we make. We are talking about a reduction of the tax base margin that of a deduction to the use like the one that for example is applied when buying a house.What happens is that the money you allocate to the retirement plan will be subtracted from your tax base and, therefore, you will pay less taxes. Contributions to colleges are made with after tax dollars. The earnings within the college savings plan occur on a tax deferred basis.
I would encourage the Smiths to take advantage of tax deductions. An account that is opened for a child at birth , which gets a monthly contribution of $100 means that by the time the child turns 18, the account would have $50,000 , assuming that there is a growth rate of 8%. If the family manages to save over $10,000, in the short term, they can get a small tax break. They can deposit the savings into an account and claim a tax deduction from the state and if possible take up to $10,000 to pay the tuition fees. For example, Pennsylvania’s tax deductions is most generous at $14,000 which translates to $430 in tax savings. There is new tax laws proposed for capping deductions at lower rates or requiring some kind of holding period. The 529 plan encourages savings for future college costs (Engdahl, 2011).
Approach to tax planning could be drastically altered by tax reform. For this year, itemized tax deductions for individuals have been increased to $6500 and $9550 for heads of households. Married couples that file taxes jointly will have deductions of $12,000. Most of the itemized deductions have disappeared leaving the home mortgage interest deduction and charitable donation deduction (Engdahl, 2011). Itemized deductions that were found in Schedule A have been adjusted. Still on schedule A, the state and local taxes remain in place but are limited. Foreign real property taxes may not be deducted under this exception.
References:
Engdahl, S. (2011). Taxation. Farmington Hills, MI: Greenhaven Press.
Ricardo, D. (2016). On the principles of political economy and taxation. Lavergne, TN: [publisher not identified].
