101 Tax Tips
- Don’t over look itemized deductions including medical expenses, auto excise taxes, state and local sales taxes, interest on mortgages and home equity loans, points, real estate taxes, casualty and theft losses, cash and non-cash charitable donations and investment interest expenses. In addition, many state tax jurisdictions do not conform to the federal tax laws regarding deducting unreimbursed employee business expenses such as job seeking expenses, continuing education, cell phone charges, tools, briefcases, luggage, computers, online service fees, trade journals, travel and meals and entertainment. As a result, you may be entitled to significant tax savings on your state income tax return.
- Looking
for a tax-advantaged way to save for a child’s education? You can now contribute $2,000 per year per child into an education savings account, and up to $15,000 per year into a 529 plan. You can even make five years of 529 contributions, up to $75,000, all at once. Just make sure not to contribute to that child’s 529 account for the next four years, and to file a gift tax return by April 15electing to spread the contribution over five years.
- Participating
in a 401K and 403B plans are one of the best tax shelters available
to you during your working years. That’s because your
401K and 403B contributions reduce your taxable earnings and grow tax-deferred.
Maximize any possible tax deferrals available through employer 401K
or 403B plans.
- Prepay
your anticipated state income tax balance due by 12/31 of the tax year,
in order to be able to claim it as a current year deduction.
- Use your
credit card to make qualified tax deductible purchases on or before
12/31. Even though you may not pay your credit card bill until after
the new year, you can still claim the deduction in the year you purchased
the items.
- Where possible,
hold investments long term (more than a year) before selling, to get
favored tax rates.
- Find a
method you are comfortable with to track your deductible expenses. Suggested: Pay
all deductible items by check, and mark in your check register by using
a different color highlighter for each type of expense (Such as green
for medical, blue for taxes, yellow for charity, etc.).
- If your
itemized deductions are "borderline" (may or may not be enough
to exceed standard deduction), try to "bunch" deductions
by selectively paying those you can control in a year you plan
to itemize, and minimize them in a year you plan to take the standard
deduction.
- You can
claim as dependents your unmarried children under age 19 (under 24
if a full time student for some part of five months of the tax year)
regardless of their income, providing you can prove you are providing
more than half of their support for the entire tax year.
- Your federal
income tax refund received for the prior year is not taxable
on your federal return. Your state tax refund is taxable only if
you itemized deductions for the year in which the tax was paid, and
received a tax benefit from deducting that tax on Schedule A.
- Don't forget
these commonly-overlooked medical deductions: mileage or transportation
for medical care, cost of maintaining tax-deductible medical items
such as eyeglass repair, hearing aid batteries, and contact lens solutions.
- Prepay
real estate tax bills by 12/31, in order to claim it as a current year
deduction.
- If you
have significant expenses connected with your employment, negotiate
with your employer to pay or reimburse as many as possible under an
accountable plan, which means you are paying the expenses with his money,
not yours. If you instead have your taxable wages increased to
pay the expenses, you may not get the full benefit of the deductions,
due to the additional payroll taxes and other limitations on employee
expense deductions.
- If you
are saving for a child's education, consider transferring those assets
into the child's name, under your state Gifts To Minors Act, which
allows at least part of the investment income to be taxed at the child's
lower rate.
- Instead
of giving cash, gift appreciated stock (which you have held more than
a year) to your church or favorite charity. You get to deduct
the fair market value, and escape paying tax on the gain.
- Don't forget
to deduct your out-of-pocket expenses in performing volunteer services
for your church or a local charity. Also, uniforms and equipment required
for these volunteer activities are also deductible (i.e. Scout leader
uniforms).
- When considering
financing options, remember that your "after tax" cost of
home equity interest is lower than the actual percentage stated on
the loan. For example, if you are in a 33% marginal (Fed/State)
tax rate, and itemize deductions, 9% home equity interest really costs
you only 6% after tax, so it is a better deal than an 8% consumer car
loan.
- Keep track
of all gambling activity for the year, including raffle tickets and
bingo, so you will be able to document deductible losses up to the
amount of any winnings you have by year-end.
- If you
have an unincorporated sole proprietorship business, hire your dependent
children under 18 to perform business tasks at a fair market wage.
- If going
through a divorce with children involved, get guidance from a knowledgeable
tax professional on how to best structure your custody arrangement
in order to assure that valuable tax benefits (such as the child tax
credit and the new higher education credits) won't be lost.
- Since interest
income is taxed at your marginal tax rate and dividends are taxed at
15%, consider shifting some of your investments from interest paying
accounts to dividend paying stocks.
- Check last
year's tax return to determine if there are any items which you can
carry over to this year, such as capital losses, net operating losses,
investment interest expense, charitable contributions and alternative
minimum tax credits.
- Be sure
to get professional tax guidance with your return, to make sure you
have not missed taking advantage of any possible deduction or credit
to which you may be entitled.
- Make sure
that your employer has you classified correctly as an employee or self-employed
contractor.
- If you
are married, make sure that you are using the most advantageous filing
status. It might be better to file separate returns include: a) when
one spouse has very large medical bills and b) when one spouse
has very large miscellaneous business or similar deductions.
- If you’re
planning to sell mutual fund shares close to year-end, try to do so
before the fund declares its annual taxable distribution. Many funds
do this in December, so confirm the exact date with the fund manager.
- If you
support your parents, they do not need to live with you to be claimed
as your dependent.
- When buying
a home, the loan origination fee (points) is deductible on Schedule
A.
- If you
can't deduct points because of insufficient itemized deductions,
they can be amortized over the life of the loan, using Form 4562.
- Try to
avoid penalties by having a sufficient amount of tax withheld
or pay estimated taxes. Also, avoid excessive IRA contributions
and insufficient IRA distributions.
- If you
have more than one employer, it is possible that you will have an excess
of Social Security tax withheld. If so, you can get a credit for the
excess on Form 1040.
- If you
are self-employed, be sure to take an adjustment for 1/2 of your SE
tax, on your Form 1040, and also for any health insurance payments.
- If you
are self-employed, consider establishing an office in your home to
enable you to deduct part of your home expenses.
- Changing
the number of allowances you claim on a W-4 form will increase your
take-home pay, but decrease (any applicable) tax refund when you file
your tax return.
- If your
spouse owes unpaid taxes, child support or student loans which affect
your refund when filing jointly, consider applying for injured spouse
relief.
- Don't overlook
the available Education Credits for you and your children.
- When withdrawing
funds from your IRA before age 59 1/2, to buy a first home or pay qualified
education costs, be sure to file Form 5329 to claim the exception from
the 10% penalty.
- Consider
including tax-exempt municipal bonds in your investment program.
- Make sure
you complete schedule "H" for all household employees earning
more than $1,000/year.
- For those
who put business miles on a personal auto, make sure you keep a written
daily log of business miles. You will almost always have more
mileage if you keep daily track of it and you will also meet the record
keeping requirement and not loose your deductions because of lack of
recordkeeping.
- If you
are making an IRA deduction and find you have no tax liability consider
making it a nondeductible contribution, thereby converting a portion
of your future distributions into nontaxable income; or consider making
it a Roth IRA contribution in which the qualifying distributions would
be nontaxable.
- If you
are self-employed and paying for your medical insurance, don't forget
a portion of the premium is an adjustment to income with the balance
being deductible as a medical itemized deduction.
- Don't forget
that if you have employer provided child care benefits reported on
box 10 of your W-2 that you must file a Form 2441 for Child and Dependent
Care Credit or that benefit will become taxable.
- If you
pay the medical expenses for your children or parents or other close
relative, you might be able to deduct those expenses even if they are
not your dependents, provided they are dependents just for medical
purposes.
- If you
are subject to the phase-outs of the Hope Scholarship or Lifetime Learning
credits, you might still be eligible for the $4,000 tuition deduction.
This deduction is available even if you do not itemize.
- If you
are leaving your employer and are under age 59 1/2, if you take your
401K or similar deferred plan distribution, you had better roll it
over into an IRA within 60 days or else it will be taxable income and
also might be subject to a 10% excise tax. The employer might
withhold 20% but your tax will be at least 15% income tax (and maybe
28% or more) plus 10% excise tax, which is higher than the tax withheld
by the employer.
- Track down
those reinvested dividends for any stock you sell. They’ll add
to your stock basis and reduce taxable gain.
- If you
are leaving employment and have your employer's stock in your 401K
or ESOP, speak with a tax pro about taking the stock out as stock not
cash, in order to take advantage of the rules for "Net Unrealized
Appreciation."
- If going
through a divorce and the property settlement involves an employer
savings plan or pension plan, be sure your attorney explains to you
how a Qualified Domestic Relations Order works and the tax consequences
to you of the QDRO.
- Be sure
you know and tell your broker when you sell, which shares you are selling. Selling
specific shares, or if you have a mutual fund, using the average cost
of the shares, can give you immediate capital gains savings, and defers
other gains until a later time.
- If your
name changes, (marriage, divorce, etc), notify the Social Security
Department ASAP. If not, the IRS will delay the processing of your
tax return.
- Think about
sales taxes. You might want to purchase certain big-ticket items before
the end of the year. Instead of deducting your state and local income
taxes, you can instead claim sales taxes paid during the year, including
taxes paid on vehicles, boats, motorcycles, RVs, and home-building
materials.
- Taxes due
on a large capital gain, are due when it occurs. The related tax should
be sent in as an estimated payment. A penalty can be assessed if not
paid.
- Consider
creating an Individual Retirement Account (IRA). The tax benefit can
be considerable, but can be limited by your income level, and if covered
by an employer's plan.
- If your
expecting to owe a large balance due when you file your tax returns,
complete a new W-4 ASAP with employer, so that more taxes are withheld
during the year. If self-employed, increase your estimated payments
for the remainder of the year.
- If you
are unable to file your completed returns by April 15th , be sure to
file for an extension. Remember, an extension only gives you time to
file, not pay the amount you owe. If you think you’ll end up
owing, you must pay the amount you estimate you’ll owe with your
extension form. In addition, although payment was sent with the extension
(Form 4868), you must still file your 1040.
- Update
your estate plan for any changes in your life. Letting your estate
documents become outdated could expose you to higher taxes.
- If your
home is partly rented, the cost of work done to the rental portion
can be used to reduce your rental income. Be sure to compile this data
during the year.
- If making
non-cash charitable contributions, be sure the recipient supplies you
with documentation. It will be needed when you complete your tax return.
- Invest
in "tax managed" or "tax efficient" funds (low
dividends and capital gain distributions) to defer taxation until you
sell or redeem shares.
- If taking
a 401K or IRA distribution, and are under age 59-1/2, consider using
one of the SEPP methods (section 72t) to avoid the additional tax and
still obtain periodic payments. Depending on the method chosen,
the amount of periodic payment received can be structured to your cash
needs. Disadvantage is that you are required to maintain such
payments for at least 5 years or until age 59-1/2, whichever is longer,
so this might not be viable for short- term need. If you change
payments at any time after beginning, the 10% additional tax will be
retroactively applied to all payments taken.
- If your
claimed as a dependent on someone else's return, don’t claim
a personal exemption on your tax return.
- Make gifts
before year-end to utilize your tax-free $15,000 gifting allowance. You can give this amount to as many individuals as you like.
- If you
have predictable medical and child care expenses during the year, consider
using your employer-sponsored Flexible Spending Account to set aside
pre-tax money for these expenses. Downside is that the money
must be spent during the year or any remainder is forfeited.
- If a household
employee cares for your dependent who is under age 13 or for your spouse
or dependent who is not capable of self care, you may be able to take
an income tax credit of up to 30% of your expenses. To qualify, you
must pay these expenses so you can work or look for work. If you can
take the credit, you can include in your qualifying expenses your share
of the federal and state employment taxes you pay, as well as the employee's
wages.
- If you
worked for more than one employer, check whether you may have overpaid
social security taxes withheld from your wages.
- Set up
a Keogh, SIMPLE, or SEP retirement plan before year-end if you’re
self-employed and don’t already have a plan. This will give you
tax-advantaged savings for retirement and will reduce this year’s
taxable income too.
- Consider
a Medical Savings Account if you work for a small employer and have
a high deductible medical insurance policy. Advantages are tax-free
interest on the account, above-the-line deduction on your 1040 (don't
need to itemize to claim), and funds remain available from year to
year (unlike FSAs).
- If you
are paying back on student loans, interest paid in the first 60 months
of repayment is deductible (up to $2,500) if you meet income limits
and other qualifications. You do not have to itemize deductions
to be eligible for this deduction.
- Consider
turning that "hobby" into a sole proprietor business,
by documenting expenses, acting in a business-like manner, etc. Your
reasonable and necessary business expenses could be deductible, including
Section 179 expensing of business equipment.
- Educational
assistance benefits you receive from your employer under an educational
assistance program are tax-free, up to $5,250 each year. If your
expenses exceed the amount reimbursed, and are paid with your own funds,
you may also qualify for the Hope credit, the Lifetime Learning Cedit
or an educational itemized deduction for these excess expenses.
- If your
spouse does not work, or works for an employer without a pension plan,
fund a deductible IRA for them.
- If you
are a sole proprietor and hire your children to work for you (reasonable
work, competitive salary, et al) gift them the money to fund either
a deductible IRA or a Roth IRA. If their salary is not high enough
to create a tax liability, the Roth IRA may be a better choice (tax
deferred growth), potential tax free distribution later.
-
Give appreciated stocks, bonds, or mutual funds to your minor children. The
dividends (and capital gains distributions) will likely be low enough to be nontaxable to them for many years and any gains on sale will be taxed at their (supposedly) lower tax rate (15% vs 20%). If child is under 19, be aware of "kiddie tax" rules.
- If you’ve
made a loan that you’re now unable to collect, you may be entitled
to a bad debt deduction. It’s important to be able to show that
you tried to collect, so take the necessary steps before year-end.
- When you
retire, determine if you have made any after-tax contributions to you
defined benefit pension plan and calculate the appropriate nontaxable
amount of each payment using the Simplified Method. This is a
direct reduction of the taxable pension payment.
- Be sure
and claim the Child Tax Credit for your minor dependents under age
17. If you have three or more eligible children, also calculate
the Additional Child Tax Credit on Form 8812.
- Buy EE
and I U. S. Savings bonds for your children (in parent's name) for
educational/college fund. If redeemed for such use, interest
is tax-free.
- Be sure
and claim the Earned Income Credit if you meet the income/qualified
child limits. Credit is "refundable" and can result
in a refund exceeding your withholding.
- If you’re
holding mutual funds in a retirement account, your investment gains
shouldn’t trigger any immediate tax. Just be aware that when
distributions are made (other than from a Roth IRA), they’ll
be taxed at ordinary income rates. If you anticipate significant appreciation,
you may want to own those mutual funds outside of a retirement plan
so any future gains would be eligible for the preferential capital
gains rates.
- If you
expect to be able to claim the EIC at year-end, have your employer
make Advance EIC payments to you (Form W-5) during the year. This
allows you to get a tax-free advance in your paycheck each pay period.
- If you
are laid off, terminate, or retire from you company in or after the
year in which you turn 55, you can withdraw funds from your qualified
retirement plan (401K or 403B) without having to pay the 10% additional
early withdrawal tax. If you rollover the account to an IRA you
will have to wait until age 58-1/2 to get this break.
- If you
have to pay an early-withdrawal penalty to your financial institution
for withdrawing a time deposit before maturity, that penalty is deductible "above
the line" as an adjustment to your gross income.
- If you
are planning on getting married near the end of the calendar year (or
even in January), do some "what if" calculations of your
individual and MFJ returns to see if there is a tax benefit to be gained
by either waiting or accelerating the nuptial date. Avoiding
the "marriage penalty" by waiting until January might be
enough to fund the honeymoon! On the other hand, a single individual
marrying a non-working spouse could see a "marriage bonus" by
scheduling the wedding in December.
- If over
65, don't forget that Medicare B premiums are deductible as medical
expenses (if you itemize).
- Long-term
care insurance premiums are also deductible (based on age of insured).
- If you
are separated from your spouse for more than six months by the end
of the year, the spouse with a child living with him/her may be eligible
to file as Head of Household, which may be more advantageous than filing
Married Filing Separately.
- If planning
to buy a house, try to close early in the year, to take maximum advantage
of deductible interest and property tax payments. Origination
fees (points) might also be deductible in full.
- Inventory
valuable possessions (photographs, video) and household furnishings
and store in your office or safety deposit box. May be useful
in case of Casualty or Theft Loss deduction.
- Do tax
planning with your tax advisor at least twice a year, early in the
year plan tax-saving strategies which might not be available later. Later,
perhaps November, determine if you should sell losing investments and
take capital loss -- either to offset capital gains or ordinary income
(up to $3,000/ year, remainder to carryover to future years).
- If you
are single and have a dependent who lives with you, check to see if
you qualify for the lower tax rates available to a "head of household" or
surviving spouse filing status.
- Don't pay
taxes on income that isn't taxable, such as gifts, inheritances, life
insurance proceeds, child support payments, personal injury damages,
disability benefits, new car rebates.
- Be sure
that your Form W-2 and all Form 1099's are correct. If they're incorrect,
have them corrected as soon as possible so that the IRS's and state's
records agree with the amounts shown on your tax return.
- If you
have rental property and want to sell and reinvest in other like-kind
property, consider Section 1031 exchange to defer taxes. You
will need to use a third-party escrow company and real estate or tax
pro to make sure it is done correctly. This cannot be used for
property having personal use (residence).
- You can
borrow tax-free on your cash-value life insurance policy. This
is technically a loan (usually at below market rates), but you are
not generally required to pay it back. The amount borrowed, and
not repaid before death, will reduce the death benefit of the policy.
- Plan to
use the 1040 tax form, instead of the 1040A or 1040EZ, to make sure
you don't overlook any deductions or credits when preparing your return.
- If filing
electronically, avoid "Rapid Refund" loans—very expensive
for short-term loan.
- If you
and/or your spouse are over 65 and/or blind, don't forget that your
standard deduction is increased by $1,000 for each "condition" (up
to $4,000 for married filing joint). A single individual's standard
deduction is increased by up to $2,500).
- When you
refinance, any points charged can only be amortized over the life of
the new loan. If you were amortizing points from a previous finance
at the time, any remaining points are deductible in the year of the
refinance.
- Retain
backup copies of all your tax returns, official tax documents and receipts
for a minimum of 3 years.
- File your
tax return electronically. You get the added assurance that your tax
return has been accepted and received by the IRS free of mathematical
errors and omissions. In addition, if you are getting a refund,
you can receive it quicker, in many instances in less than 2 weeks.