More Ways to Lower Your Taxes

by  /  Tax Planning

Let us continue today with our discussion of more tax deductions, credits and reductions for our 2016 tax returns. In addition to the seven tactics we discussed last time, please consider the following:

Job Hunting Costs

  • If you are searching for a new job in the same field as your last job, whether or not you were successful in finding the new job in 2016, you can deduct job-hunting expenses as miscellaneous deductions if you itemize, subject to a floor of 2% of your adjusted gross income (“AGI”).
  • Deductible costs include:
    • Taxi fares, parking tolls, 54 cents per mile for self-driving, food and lodging for overnight trips
    • Employment agency fees
    • Costs of printing resumes, business cards and advertising
  • You can also deduct moving expenses to your first job location, even if you do not itemize, as long as it is at least 50 miles away from your old home.

Reinvested Mutual Fund Dividends

  • If you, like most investors, reinvest mutual fund dividends into additional shares, the mutual fund will send you a 1099 to remind you that the amount is taxable even though you received no cash. Remember that each new purchase increases your tax basis in that fund. Increased basis results in less capital gain when you sell the fund.
  • The reinvested dividend results in tax in the year of receipt, without the receipt of any cash to pay the tax [referred to as “dry income”], but at least the annual increases in basis from the dividends being reinvested reduces the ultimate capital gain upon a sale.

Amortizing Bond Premiums

  • If you acquired a bond with a higher than market interest rate and paid a premium to face value, you must either:
    • Amortize the premium over the remaining life of the bond, by subtracting each year’s share of the premium from the interest reported each year on your tax return, and reducing the cost basis by the amount of premium amortized; or
    • Ignore the premium until you sell or redeem the bond, when the basis added by the bond premium will reduce the taxable gain dollar for dollar.
  • Better to go through the hassle of amortizing annually, because it reduces ordinary income, rather than the lower-taxed capital gain.

Child or Dependent Care Credits

For a qualifying child (age 13 or younger) or dependent/spouse (who is physically or mentally incapable of caring for his/herself and shares the taxpayer’s principal abode for at least half of the year), two options are available:

  • An employer-sponsored child/dependent care reimbursement account allows deferral of up to $5,000, avoiding federal income taxes and 7.65% of social security tax; or
  • For two or more children or dependents, you can receive a tax credit for up to $6,000 of expenses for care that enable the taxpayer to work. The credit ranges from 20 to 35 percent of the qualifying expenses, depending on level of AGI.

Business Equipment Depreciation

Accelerated depreciation can prove very useful for businesses (even those run from a home), encouraging the acquisition of needed equipment.

  • Bonus depreciation of 50% is allowed for equipment placed into service in 2016 or 2017.
  • Perhaps even more favorable is the section 179 expense election, allowing the business owner to write off the full cost of qualifying assets in the year placed into service, up to $500,000. This phases out after you put more than $2 million worth of assets placed in service in a year. Think about that new computer or printer this year, before rates are lowered and deductions become less valuable.

Divorce and Legal Fees

  • Legal fees and court costs of a divorce are generally not deductible, as personal expenses.
  • However, if you itemize, you can deduct the portion of the legal fees for acquiring alimony, because that is taxable income, and tax advice. Be sure to get a detailed invoice separating out the various services.
  • This is deemed to be a miscellaneous expense deductible over 2 percent of AGI.

There are other deductions/credits that are more widely known and applied. These and last submission’s lists are some of the lesser known, yet still useful, tools to lower your tax liability.

 

Remember, it’s not what you make that matters…it’s what you keep!



Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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Lower Your Taxes

by  /  Tax Planning

Last time we discussed the likelihood of tax revision/reduction passing in the Republican-controlled Congress early in the new Trump administration. In anticipation of lower tax rates next year, we should focus on deferring income and accelerating deductions/credits/reductions this year. It is worthwhile to mention a few tactics that are often overlooked, but could reduce your tax bill.

Tax Credits and Deductions

  • A tax credit is a more valuable dollar-for-dollar reduction of your tax due (if it is a refundable credit, it can generate a check back to you even if you owe no taxes, if it is non-refundable it can only decrease actual taxes you owe).
  • A tax deduction is less valuable because it lowers the amount you pay tax on, rather than directly reducing the tax.
  • If you are in the 28% tax bracket, a $1.00 deduction lowers your taxes by 28 cents, but a $1.00 credit lowers your taxes one dollar.

Tax Loss Harvesting

  • Sell your losing investments before year end to generate realized losses to offset other gains from sales or distributions from your mutual funds.
  • This is not a deduction, but is a quantifiable reduction in taxes.
  • Remember the wash sale rule and do not buy the securities you sell at a loss within thirty days before or after the loss sale.

Student Loan Interest Paid by Parents

  • If you are not claimed as a dependent on your parents’ tax return, but they pay back your student loans, you can deduct up to $2,500 of student loan interest each year, even if you do not itemize.
  • Your parents’ repayment is deemed to be a gift to you, followed by your payment.
  • Your parents will not mind, because, in addition to the fact that they love you, they could not deduct the interest anyway, as it is your debt.
  • Do not forget to deduct student loan interest you pay yourself, also included in the $2,500 maximum.

State Tax Paid with Last Year’s Return

When you list your 2016 state tax withholdings or estimated tax payments,  remember to include the amount you submitted last spring with your state tax return for taxes you owed from 2015.

American Opportunity Credit

  • For all four years of college you can receive a credit for 100% of the first $2,000 spent on qualifying college expenses and 25% of the next $2,000.
  • The credit phases out at a couple’s Joint Adjusted Gross Income (“AGI”) of $160,000.
  • This is a refundable credit, so if it reduces your taxes below zero, you can receive a check from the IRS for the difference.

Credits for Energy Savings Home Improvements

  • Up to $500 of eligible energy saving improvements, such as insulation, efficient HVAC systems and new windows, based on 10% of the cost.
  • Qualified residential alternative energy equipment, such as solar hot water heaters or wind turbines, get a credit of 30% of the cost, including installation, without the $500 limit.
  • These credits expire this year, unless renewed.

Out-of-pocket or In-kind Charitable Deductions

  • Charitable contributions in cash or by check are easy to remember, but do not forget other gift vehicles.
  • Gifts of appreciated property (stocks) can deliver the same dollar amount while also avoiding capital gains tax on the sale of the stock and the gift of the proceeds.
  • Assets with a loss should first be sold and then the cash proceeds donated to the charity.
  • Gifts of personal assets, such as clothing or other personal items, are deductible at thrift shop value.
  • If you drove your car for a charity, deduct 14 cents per mile, plus parking and tolls. You cannot deduct the value of your time, however.
  • Keep the receipts to substantiate your deduction and individual contributions over $250 need an acknowledgement from the charity as to the support you provided.

Medicare Premiums for the Self-employed

  • If you continue to run a business after you are eligible for Medicare and if you are not eligible for coverage on another employer’s or your spouse’s employer’s health care plan, you can deduct the premiums for Medicare Part B and Part D, plus a Medigap supplemental policy.
  • You need not itemize to claim this deduction and it is not subject to the 7.5% of AGI threshold for those over age 65, that increases to 10% of AGI after 2016.

Notice that some of these deductions/credits apply whether you itemize or claim the standard deduction on your return. Proposals for 2017 include increasing the standard deduction to $30,000 for a couple filing jointly.

The first partner I worked for out of law school shared with me what, in retrospect, has proved to be valuable tax advice: “Be sure you disclose every penny of income on your return, but be equally certain you have taken every penny of justifiable deduction from that income.”

 

Remember, it’s not what you make that matters…it’s what you keep!



Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

read more