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Deadline approaching for clients with a tax-filing extension: Tax Strategy Scan

Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.

Deadline is approaching for clients who requested a tax-filing extension
Taxpayers who requested a tax-filing extension should ensure that they file their returns by Oct. 15, according to this article in Kiplinger. Not beating the deadline would result in a hefty penalty that could hit as much as 25% of their tax dues. Those who failed to pay their tax bill by April 15 deadline also face a penalty, which is 0.5% per month plus interest.

A portion of a client’s Social Security benefits may be subject to federal income tax depending on their income levels.
U.S. Department of the Treasury Internal Revenue Service (IRS) 1040 Individual Income Tax forms for the 2016 tax year are arranged for a photograph in Tiskilwa, Illinois, U.S., on Tuesday, March 28, 2017. Due to the Emancipation day holiday, this year's income taxes will need to be filed by April 18 instead of April 15. Photographer: Daniel Acker/Bloomberg

After a divorce, only one parent can typically claim child-related tax breaks
Child-related tax breaks can still be claimed by a parent or both parents after a divorce but they have to meet certain requirements under the Tax Cuts and Jobs Act. Parents must be categorized as the custodial parent or the noncustodial parent, generally the custodial parent is the one who can claim the tax breaks but there is also the noncustodial parent rule that can allow the noncustodial parent to claim as long as requirements are met.

Will IRS pre-approve client taxes? Sometimes, yes
Clients can get advanced tax approvals from the IRS with a private letter ruling, but they shouldn’t seek one unless they are highly likely to receive their desired answer, according to this article in Forbes. Clients receiving a “no” from the IRS can withdraw their request but run the risk of having their tax return flagged. Meanwhile, those who want tax opinions should seek them before filing their tax returns.

These workers are saving the maximum in their 401(k) plans
More than 4.6 million taxpayers made the maximum contributions to their 401(k) plans in 2016, with a majority of them coming from the 45-55 age group, according to IRS data in this CNBC article. Saving in a traditional 401(k) is one strategy to reduce taxable income as the contributions are made on a pretax basis, but clients owe income taxes on retirement withdrawals. Directing some of their savings in after-tax Roth and taxable accounts can help them reduce the tax bite and manage their tax brackets in retirement. “From a liquidity standpoint, you want to be aware of having a good mix of assets,” an expert says.

The average expense ratio among the top-performers is 40 basis points higher than the average.
April 9

Tips for clients to avoid expensive inheritance mistake
To avoid committing financial errors, Jim Germer, a CPA and financial advisor at Cetera Financial Specialists, cites the importance of carefully considering a successor or contingent beneficiaries for an estate that has been listed as a primary beneficiary on IRA, rollover IRA or 401K applications, according to this article in Bradenton Herald. “So consider beneficiaries better served by taking a series of small distributions over several years. Lump sums may lead to substantial tax bills,” an expert writes.

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