I’m doing my taxes now, and I am just so DONE. I don’t know if I’m doing them right or leaving money on the table. It just makes me realize that I don’t understand my finances as well as I want to.
Sound familiar? Have you heard that same little voice inside your head? I’ve certainly heard it from several people who have reached out to me lately.
Especially if you’re in the tech industry, you probably have several ways that you can make your tax experience much more…not horrible, what with your 401(k)s, high tax brackets, and tendency to have company stock.
Tax returns are a wonderful view into a person’s life. (I say this as an avowed finance nerd.) They tell me not just the obvious things like how much money you make, but also if you sold a bunch of company stock, if you have kids, if you’re saving for retirement, if you have a rental property. It won’t tell me your favorite food or the last book you read, but when it comes to things that affect your financial life, it’s the Holy Grail.
Is it really any surprise, then, that doing your taxes is stressful, confusing, and overwhelming? To do your taxes, you have to delve into almost every part of your financial life. And let’s review who enjoys getting knee-deep into the muck of their own financial life….uhhh, that’d be nobody.
I will give this to taxes (aside from making sure we have public schools, national parks, and paved roads): They are the One Thing that gets everybody thinking about their finances. And sometimes we need that kick. Better still, though, would be thinking about our taxes well before April 15-ish.
Much like the rest of your financial life, planning for your taxes makes the whole experience so much better, both financially and emotionally.
Yes, You DO Your Taxes. But Do You PLAN Your Taxes?
By the time January rolls around, your tax situation is largely fixed for the previous calendar year. Your income is what it is, you bought and sold whatever investments you were going to buy and sell, you donated what you were going to donate to charity, and so on.
There are, of course, a few things you can do while you’re preparing your taxes to improve last year’s tax situation. Most commonly, you can make contributions to IRAs and Health Spending Accounts (HSAs). You might also undo (reverse or “recharacterize”) a conversion of a traditional IRA to a Roth IRA.
But most of the tax benefits you can get are going to be the result of advance planning, not last-minute catch-up. Here are some of the major kinds of tax planning that you might benefit from, especially if you’re in the tech industry:
I’m talking about 401(k)s here. Yes, IRAs are a possible retirement savings vehicle, but they’re usually not as good as a 401(k). Their contribution limits are much lower than a 401(k)’s ($5500 vs. $18,000), there are income limits on either eligibility or tax deductibility, and there’s no automatic paycheck deduction.
However, while you can contribute to an IRA up until the tax deadline the year after, you have to finish contributing to your 401(k) by December 31. So, you can’t wait for tax season 2017 and look back at 2016’s tax situation to decide on your contribution. You have to look ahead during 2016 (or even 2015) to figure out how much you can, how much you need to, and how much you should contribute to your 401(k).
Getting or Refinancing a Mortgage
If you have a mortgage on your home, you had to make the decision about buying points (basically, prepaying a bunch of interest in the year of purchase, to lower the ongoing interest rate). You can deduct the money you spent on points in full in the year you pay them, if you meet a variety of IRS requirements.
Some years are going to make that itemized deduction more worthwhile than others, eh? If, say, you’re selling a bunch of company stock, at a gain, you’re going to drive your income up. Which means itemized deductions are worth even more. So, if you’re also buying a home in the same year, that makes buying points more worthwhile. But you gotta think about that ahead of time.
Donating to Charity
Do you give a lot to charity? Or maybe want to? There’s possibly some significant tax savings to be gotten there, while not diminishing the help you provide to charities.
- Do you usually give cash? If you have any investments that have grown a lot in value—like say, company stock—you should consider donating those instead. You can still get the itemized deduction just as you would with a cash donation, but you also avoid the tax bill you’d otherwise pay if you sold that investment.
- Does your income change from year to year? Was your income high this year because your company stock went gonzo? Or was it low because your startup laid you off and you spent months looking for a new job? Consider concentrating your charitable contributions in those high-income years because the itemized deduction will be worth more. The higher your income, the higher your tax rate, the more money you save for each dollar deducted from your taxes.
Heavy Concentration in (Company) Stock
Some of my tech industry clients have a lot of their financial worth tied up in a single stock, their company stock, which they’ve usually passively acquired over the years through stock options, Restricted Stock Units (for all you Google employees…that’s Google Stock Units), employee stock purchase plans, and so on. If you know me, you know I zero in on this because it’s a big risk.
Lowering that risk is often Priority #1, taxes be damned. But because selling that stock can bring with it a big tax bill, it’s worthwhile to map out a plan for getting rid of the stock. You can make a schedule for selling it that spreads the taxes out over a few years, or you can donate it so you don’t owe taxes on it at all. Or hell, you can give some of it away to your kids or nieces and nephews.
Flexible Spending Accounts
Flexible Spending Accounts are a good employee benefit that I hope you have available to you. You put pre-tax dollars into an FSA, and you can use that pre-tax money to pay for medical expenses or for dependent care.
You have to decide on your contribution to an FSA in the previous tax year. So, for tax year 2017, you need to have chosen your FSA contribution level during open enrollment in 2016. On top of that, FSA contributions are use it or lose it: whatever money you don’t spend by the end of 2017 (or possibly up through March 2018), you forfeit.
I know several women employed in the tech industry who also run side hustles, doing freelance or consulting work in their area of expertise. Any income they have there is added on top of their full-time job salary. Having a higher income can kick you into a higher tax bracket, can make you ineligible for certain deductions or credits, and generally make your tax situation worse. (Let’s keep in mind that overall you’re better off, the more money you make.)
But if you can control the timing of your income, you have more control over your tax bracket, deductions, credits, etc. If you made a lot of money this year through salary or commission or investments, maybe you can delay your side-hustle income until the next tax year, or accelerate your expenses. Or, the reverse! if you know next year is going to be a higher-income year.
But you have to make those decisions before December 31.
Do You Need an Accountant or a Financial Planner?
Some folks who have reached out to me lately have done so with only the vaguest of inklings of the kind of help they need. They know their taxes make them sad and discomfited. But do they need a tax preparer, or do they need a financial planner?
An accountant can indeed be a powerful financial partner. But taxes are only one part of your financial life. Sometimes they are indeed the most important consideration, but usually they’re simply one part that you have to balance with all the others.
The more complex your total financial life, the more you need a professional who deals with that totality, not just taxes. Children or other dependents, inheritances, rental real estate, company equity, robust employee benefits, fluctuating income, and so on…you’d benefit from working with a professional who will look at all of these things in coordination with one another. And one who works with an accountant on your behalf? Even better!
Question: What part of doing taxes stresses you out the most? You can leave a comment below.
Has tax season made you realize your finances have gotten away from you? Reach out to me at or schedule a free 30-minute consultation.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.