by Jonathan Goudy / 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!
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.