There is hardly a month left and very little time to do things right to minimize our taxes for this year. It is not too late yet if you act now. Here are some of the tips for reducing your taxes legally.
Most of who own homes generally itemize and are aware of certain deductions. But there are many items that can be easily overlooked.
- In medical expenses every thing that is prescribed and not reimbursed is deductible, including the health insurance premiums (but not life insurance) and also long term care insurance. Your traveling mileage to the doctor, hospital and labs is deductible; 23.5 cents (2014 rate) per mile are allowed. Threshold for this is 10% of AGI (7.5% for seniors).
- State and local taxes (or sales taxes), property taxes and car registration fees (partial) are allowed.
- If you donate, just keep receipts and a detailed list of items donated and their current market value. It is all deductible.
- Financial advisor fees can be deducted. Also safe deposit box fees, expenses for finding a new job even if you are unsuccessful, tools and uniforms required for your business, professional magazine subscriptions, non-reimbursed business expenses are deductible. Some of them have a floor of 2% of your AGI.
- If you volunteer your time, your mileage to the place of volunteering and back is deductible (14.0 cents per mile for 2014).
- Casualty and theft losses are deductible under limited conditions.
Be very particular about declaring all income on your 1040. If you receive a 1099 form then it must be included; even if you do not have a 1099 and you know you had income then include that. Interests, dividends, pensions, social security income, withdrawals form IRAs, rentals, royalties and other income, unemployment compensation and income from gambling or lottery etc. are all to be reported.
Ways of reducing the income are by taking capital losses (up to $3,000) by selling stocks that have lost value and spreading income over more than one year if possible. More capital losses can be carried forward for next year.
ADJUSTMENTS TO INCOME
You can claim certain expenses like school supplies (if you are a teacher) up to a limit, unreimbursed moving expenses (23.5 cents per mile) only if you move for a new job, HSA contributions, new IRAs, student loan interests, alimony payments and penalty for early withdrawals of savings are some of the reductions to gross income. These adjustments are used to reduce income before the taxes are calculated.
The deductions taken as credit to the taxes give you the most bang for your buck. Foreign tax credit is probably the most forgotten credit. If you have 1099s showing this tax paid, you owe it to yourself to make sure that you take that credit; it is a credit that reduces your final taxes dollar for dollar. Child and dependent care expenses, education expenses for the classes you took, residential energy saving expenses and child tax credits are some of the examples that need to be explored for credit against taxes. In some cases earned income credit is also available. There are limits of income and other limits to all of these.
Another one which is most forgotten is the unnecessary additional taxes paid for social security; this happens especially when you change jobs.
Many states also allow an adjustment for the contributions to 529 plans.
WHY IS TAX PLANNING SO CRITICAL
Tax planning, especially for medium and high-income families, is something that must be considered from the beginning of the year as part of estate-planning tool.
.Tax Planning for Ages between 60 and 70.5
Many people retire around the age of 60 or 62 either because they want to or because they are asked to. This creates a dilemma because they have to figure out as to where the income stream is coming from until they start their pensions or social security payments or withdrawals from IRA.
In fact this is a great opportunity to review their income stream for every year between now and their age of 70.5 and determine how they should be handling the withdrawal of their non-taxable assets. If they are older than 59.5 then there is no penalty for withdrawal from IRA or 401k or similar programs; the only tax they will have to pay is the income tax for the withdrawn amount at their regular tax rate.
Many people see their income drop when they retire and hence they pay much less income taxes. However, at the age of 70.5 when the required minimum withdrawal kicks in, their taxable income can go up substantially which can push them into higher income tax bracket. They can reduce the disparity of income by balancing the withdrawal between the age of 60 and 70.5 so that they can take advantage of lower taxes when the income has already dropped. This way, by controlling how much they withdraw from non-taxables, they can stay under the higher bracket for taxes and they have almost 11 years to do so. It also helps to reduce the total amount in the IRA when the time comes to start minimum withdrawals. The amount withdrawn earlier does not have to be spent; it should be just reinvested in taxable accounts.
If they withdraw just stocks (or mutual funds) from the IRA (without selling it first inside IRA), they would, of course, pay income tax on the value of the stock at the time but after the stock comes out of the IRA the rest of the appreciation is taxed on the capital gains only, at a much smaller rate than the income tax rate.
Manage your adjusted gross income on 1040
It is critical that total income and the taxes are estimated (AGI on 1040) at the beginning of the year. Very many tax calculations depend on the value of your AGI.
For a married couple on Medicare, if AGI exceeds $170,000 they pay additional Medicare taxes of $42.00 per month; if the AGI exceeds $214,000 they will end up paying additional Medicare taxes of $104.90. They could avoid this extra charge if they pre-plan and limit our AGI.
Mo Vidwans, CFP(R), MBA
984 888 0355