7 Questions to Ask Your CPA Before Year-End

Kolleen Schocke |

Although tax season is still months away, tax management should begin in the fall – especially for high-income earners facing the 3.8% net investment income tax (AMT) and other taxes. Below are 7 questions that can help you open a discussion with your CPA or financial professional about next year’s tax bill. Have the discussion now so you still have time to make adjustments if necessary.

  1. Can I limit my exposure to the 3.8% Medicare surcharge tax?

The 3.8% Medicare surcharge applies to net investment income of singles with modified adjusted gross income (MAGI) over $200,000 and couples over $250,000. (MAGI is adjusted gross income (AGI) plus some deductions added back in for tax-free foreign income, IRA contributions, student loan interest, etc.) The tax is due on the smaller of net investment income (interest, dividends, annuities, gains, passive income, and royalties) or the excess of MAGI over the thresholds.

If you think there may be some exposure, meet with your financial professionals to review the tax efficiency of the portfolio holdings, perhaps moving less efficient investments into tax-deferred accounts, and capitalizing on tax-loss harvesting. You may also want to consider an installment sale to spread out a large gain if that keeps your AGI below the thresholds. If real estate is involved, a like-kind exchange will also defer the gain.


  1. Can I maximize the tax break using a Flex Plan for child costs?

You can still claim the dependent care credit to the extent that your expenses are greater than the amount you pay through your flexible spending account (FSA).

The maximum dependent care costs funded through an FSA are $5,000, but the credit applies to as much as $6,000 of eligible expenses for filers with two or more children under the age of 13. In that case, you should run the first $5,000 of dependent care costs through the FSA, and the next $1,000 would be eligible for the credit on Form 2441.

For most filers, taking the dependent care credit will save an extra $200 in taxes. Of course, no credit is allowed for any childcare costs that are paid via the flex plan.

  1. What if my school-age child went to summer camp?

Costs related to a child’s summer camp qualify for the dependent care credit. So, if you sent your child to any special day camps this summer (i.e. sports, computers, math, theatre, and study) don’t forget this break.

However, the costs of summer school and tutoring programs aren’t eligible for credit. They are treated as education, not care. The other rules for the credit aren’t affected: the child must be under 13 and expenses must be incurred so that parents can work.

  1. How should I handle an inherited IRA?

If you inherited an IRA last year, a tax planning deadline is looming. The IRA’s beneficiaries are set for September 30th of the year following the death of the IRA owner. Typically, non-spouse heirs must take distributions from inherited IRAs within 10 years of the owner’s death, unless one or more of the beneficiaries of the account are not individuals.

With non-individual beneficiaries, the IRA has to be cleaned out within five years for all beneficiaries, which is generally a negative because it denies tax-deferred growth to the beneficiaries for that extra five years, or longer for certain beneficiaries. The issue occurs when the owner names a charity or college as one of the beneficiaries.

Redeeming a non-individual IRA interest by September 30th can pay dividends. If the charity or school is paid off by that time, the remaining individual beneficiaries can take distributions for ten years, enjoying more tax-free build-up inside the IRA.

  1. How can I optimize the earnings on my children?

Optimize a child’s summer job by contributing to a Roth IRA. The child can contribute up to $6,000 as long as they have earned income of $6,000 or more. The parents can make a contribution for the child, although the parent’s pay-in counts toward the $15,000 annual gift tax exclusion.

What difference does this make? A parent’s generosity can provide a nice nest egg. If the child works for a couple of summers and contributions are made annually, the future balance of the account could be significant. And remember, all qualified withdrawals are tax-free under current tax law!

  1. How can I use the 0% rate on long-term gains?

If your taxable income without long-term gains is below $40,400 for singles or $80,800 for married couples filing jointly, profits on the sales of assets owned over a year are tax-free until the gains push you above thresholds. You will be taxed over 15% on those gains, and if your income rises above $445,850 for singles or $501,600 for married couples you will be taxed at a 20% rate.

If part of the gain is taxed at 0% and the rest at 15% claiming more deductions or making a deductible IRA contribution gives you two tax breaks 1) claiming the deduction saves on income tax and 2) it allows more capital gains to be taxed at the 0% rate.

However, taking more tax-free gains raises the adjusted gross income, which can cause more of your Social Security benefits to be taxable. In addition, your state income tax bill may jump since many states tax gains as ordinary income.

  1. How can I donate most effectively?

One way to turbo-charge donations to charity is by giving away appreciated assets, such as stocks. The appreciation escapes the capital gains tax, and you will get a deduction for the full value in most cases, as long as you’ve owned the asset for longer than a year.

Charitable deductions are normally limited to 60% of your Adjusted Gross Income, except for 2021, when you can claim deductions for up to 100% of your income as part of the CARES Act.

The Right Assets to Donate

We recommend you do not donate any assets that have declined in value. If you do, the capital loss is wasted. From a tax point of view, you’re better off selling the asset and donating the proceeds. This also applies if you plan to make a gift to a person. If you give an asset that has diminished in value, you are then unable to sell the asset and deduct the loss.

Consider A Charitable Lead Annuity Trust

A charitable lead annuity trust is a trust that pays an annuity to a charity for a set term. Then, what’s left goes to the donor or other beneficiaries. Although interest rates may increase, the donor still gets a nice up-front write-off. That deduction can be used to offset income generated from a Roth IRA conversion, such as letting the donor experience a full lifetime of tax-free withdrawals from the Roth.

Sustainable Non-Cash Donations

If you fail to substantiate property donations, you can lose the write-off. For example, a veterinarian donated over $100,000 of fossils to a charity, and although he did attach Form 8283 to his tax return and received letters from the charity acknowledging the gifts, the fossils were not appraised properly as they were not seen by a qualified expert, which is mandatory when claiming a deduction over $5,000 for non-cash donations.

The taxpayer also failed to obtain a contemporaneous written acknowledgment from the organization stating that he received nothing of value in return for his gift. As a result, the tax court upheld the IRS determination to disallow the deduction.


Understanding tax laws isn’t easy, especially since the tax laws change constantly and are often tricky. Attempting to take advantage of benefits can be a confusing process. Though there are some great tips and explanations above, seek the assistance of a tax professional whenever you have any questions about your own situation.





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