The Standard Deduction May Be Costing You – This technique could save you plenty
Many taxpayers default to the standard deduction when filing their tax return because of its simplicity. Unfortunately, this often creates a higher tax bill. Here is a tip to ensure it does not happen to you.
Only about a third of Americans file income tax returns using itemized deductions. Unfortunately many of those who don’t itemize are overpaying their taxes. Don’t wait until tax time to figure out if itemizing your deductions yields a lower tax bill. Start now to review your situation and plan for a reduction in your taxes by the end of the year.
The standard deduction for 2017 is $6,350 for individual taxpayers and $12,700 for married couples filing jointly. If you can identify deductions over these amounts, your taxable income will be lower. The first step in this process is to estimate your known itemized deductions. Start by breaking out your potential itemized deductions into these five piles.
Pile #1: State and local taxes. You may deduct state and local taxes on either property or sales, but not both. If you live in a place with high property taxes, or you’ve made big purchases during the year and paid a lot in sales tax, this could be a big source of itemized deductions.
Pile #2: Mortgage interest. You can deduct interest paid to secure a primary or secondary residence. Since interest payments are front-loaded onto the early years of a mortgage, this is a big deduction for new homeowners.
Pile #3: Charitable contributions. Contributions to qualified charities can be used as itemized deductions. This includes cash donations, non-cash donations, and even mileage on behalf of qualified charities.
Pile #4: Medical expenses. Medical expenses greater than 10 percent of your adjusted gross income can be deducted from an itemized tax return.
Pile #5: Miscellaneous itemized deductions. With miscellaneous itemized deductions, you can generally deduct the total that exceeds 2 percent of your adjusted gross income. There are many potential deductions, such as:
- Job-related clothing and equipment
- Unreimbursed job expenses
- Job-hunting expenses
- Tax preparation fees
- Casualty and theft losses
Total up your potential deductions, remembering to only count the deductions for miscellaneous and medical expenses that exceed the adjusted gross income thresholds.
Ideas if you are close
If you are close to your standard deduction threshold, here are some ideas to push you over the line.
Donate stock. If you donate cash to a favorite charity, consider donating profitable stock held more than one year. Not only will the donation be an itemized deduction based on the current value of the stock, the long-term gain will not be taxable.
Make two years of giving in one year. Since you can claim donations when paid, consider prepaying next year’s donation in the current year. This effectively doubles your donations for one year, allowing for a higher itemized deduction total.
Pay taxes prior to year-end. The same technique can be used with property taxes and other tax payments. Make next year’s payments in December of the prior year. This will effectively put two years of taxes into one filing year. While you may not be able to itemize deductions every year using this technique, it can yield a lower tax bill this year.
Defer income. A good option for small businesses is to delay the receipt of income, which lowers the threshold for claiming medical expenses and miscellaneous deductions.
On occasion, shifting deductions may result in using itemized deductions in one year and the standard deduction in the next. However if you plan well, you’ll have a lower total tax burden over the course of both years. Please feel free to ask for help if you wish to review your situation.
Tax Credits versus Tax Deductions – Which is worth more to you?
Deduct this or take a Tax credits? Which is worth more to you? Often the answer is not as simple as you think.
Every industry and profession has common terms that are used so often those of us in the business often forget that most people do not have the depth of understanding that a person working within the tax code might have. One of these areas is understanding the differences between the tax terms “deductions” and “credits”. Is one better than the other?
If it were simple
Dollar for dollar, a credit is worth more to you than a deduction. Why? A credit is a direct reduction in tax, while a deduction reduces the amount of income that gets taxed. Here is a simple chart showing the difference.
Assuming you have a $2,000 tax credit, how large a deduction would you need to be indifferent?
|Your marginal tax rate||Deduction required to equal $2,000 tax credit|
Note: This example does not account for the possibility that the deduction could move you into a lower tax rate nor does it consider other tax factors, including phaseouts.
So on the surface it appears that a credit is worth more than a deduction to you. But the real answer is….it all depends. Here are some things to consider:
How much is it? A large deduction could be worth more to you than a small credit. In combination with your marginal tax rate, you can calculate the equivalent credit that equals your deduction.
Your marginal tax rate. Remember, a similar deduction is worth more to someone in the 35% income tax range than it is to someone being taxed at 10%.
Are there phase-outs? Most credits and deductions phase out when your income is over certain amounts. Consider this when determining the true tax benefit. When a deduction reduces your income it could make other credits and deductions that were previously phased out now available to you.
Is the credit refundable? Some credits get a “bonus”. While you cannot deduct your income below zero, you can sometimes receive credits that create a refund even if you owe no tax. Credits that have this “bonus” feature are called “refundable” credits.
When it matters
Educational Expenses. If you pay tax-deductible tuition for undergraduate studies you must decide what tax alternative is best for you. Among the many alternatives that need to be evaluated are the American Opportunity Credit, the Lifetime Learning Credit, and the Tuition Deduction.
Understanding the Cost. Remember the value of a deduction to you needs to be filtered with your marginal tax rate to see the true tax benefit. Here is a simple formula.
|Deduction Amount||x||Your Tax Rate||=||Your Tax Benefit|
Thankfully, professional tax software allows for quick analysis of the choices. Please call if you have questions.
Ten Commonly Overlooked Deductions
Don’t forget these ideas to lower your taxes
The tax code is about 75,000 pages long, so it’s not surprising there are many overlooked money-saving deductions hidden within it. Check out this list of commonly overlooked deductions. You might wind up with a bigger refund than you expected.
- State sales tax alternative
You can choose to deduct state and local sales taxes rather than state income taxes on a tax return using itemized deductions. This is especially useful for residents of states that don’t have state income taxes. It can also be used if you made enough purchases during the year that your state sales tax deduction is larger than your state income tax deduction.
- Mortgage discount points
When you buy a home you can generally deduct the cost of mortgage “discount points” to lower your interest rate. A point is a fee equal to one percent of the mortgage amount and it lowers your mortgage’s interest rate. When you refinance a mortgage, you spread the cost of your points over the life of the mortgage. Many taxpayers forget that when they sell their home they can immediately deduct the remainder of the points not yet used as a deduction.
- Job-hunting costs
Expenses for the purpose of finding a new job in your current occupation are generally tax deductible. You can usually deduct fees paid to recruiters or placement agencies. Deductions also include the costs of printing materials, postage, preparing resumes, and travel expenses.
- Student loan interest
You can deduct up to $2,500 in interest paid on student loans from your tax return. This is true even if someone else helps you pay your loans. Parents who have co-signed student loans (creating legal obligation for the debt) often forget that they are also now eligible for the deduction on payments made by them.
- Alimony legal fees
While most people who pay alimony know it is tax-deductible, fewer know you can also deduct money you spend on your alimony agreement, such as attorney fees. Make sure your lawyer breaks out the amount spent on the alimony agreement from the amount spent on the divorce, which is not deductible.
- Casualty and theft losses
Amounts lost to theft or catastrophes (such as fires or earthquakes) can be deducted from your tax return. The timing of taking the loss and the amount of the qualified loss can get complicated, so ask for help if you think it applies to your situation.
- Occupational education
If you are required by law or by your employer to take continuing education courses, or if you can show you need to take courses to maintain or update your skills in your current occupation, you can often deduct those costs.
- Professional subscriptions
Expenses for trade magazines, professional journals or digital subscriptions relevant to your profession can be deducted as an itemized deduction.
- Advisor fees
Fees for investment management or financial advice on income-producing investments can be deducted from itemized returns. This includes your tax preparation fee.
- Small business tax breaks.
There are a number of special business incentives built into the tax code. This includes special depreciation rules to the now-permanent research credit. A deduction even exists for domestic production of qualified products.
As with any part of the tax code, certain qualifications must be met and limits apply. Please feel free to ask for help if you think any of these ideas apply to you.
Research Your Preferred Charities
Often during an audit, what you thought was a qualified deduction to a charitable organization is ruled non-deductable
Research Your Preferred Charities
November and December seem to be the months we are rained upon with charitable organization solicitations. Some of the groups, such as the American Red Cross, the Salvation Army, United Way, and the American Cancer Society are household names. Others are less known. Here are some tips on how to research these organizations prior to donating funds.
1. Charitable organization efficiency. For every dollar you donate, only a percentage of it is actually used to fund programs. Much of your money is used for fundraising and administrative costs. So how do you know which charitable organization is using your contribution most effectively? Here are three websites that can help you assess potential charities.
2. Avoid Fraudulent Solicitations. It is often best to avoid donating over the phone or via email solicitations. These are two common ways thieves target their victims. Instead of reacting to a phone call or email, a better idea is to pro-actively plan who you wish to give money to each year. An additional benefit of this approach is that you avoid the fees paid to these middlemen fundraisers out of your donations.
3. Confirm the Deductibility. Many smaller organizations will represent themselves as a qualified charitable organization, but have not kept their non-profit status up-to-date. If unsure whether your desired charity has kept their records up-to-date, you can check the IRS website for a full list of qualified organizations. Here is the link:
4. Needing a receipt. Remember cash donations $250 or more require a written confirmation from the charitable organization of your donation in addition to your canceled check or bank receipt. If you are not sure whether a confirmation will be forthcoming, limit your deduction to some amount under this $250 threshold.
Tax Savings for Non-Itemizers – Can’t itemize?
There are still tax breaks for you
If you own a home you probably itemize your deductions on your tax return. But what if you are a Non-itemizer? Can someone using the standard deduction still get a tax break?
Tax Savings for Non-Itemizers
A common misconception in tax filing has been that if you use the Standard Deduction versus itemizing your deductions you have few additional benefits available to reduce your tax bill. This is often not the case.
Standard or Itemize?
Every taxpayer can take the Standard Deduction to reduce their income prior to applying exemptions. However, if your deductions are going to exceed the standard amount you may choose to itemize your deductions. The primary reason someone itemizes deductions is generally due to home ownership since mortgage interest and property taxes are deductible and are generally high enough to justify itemizing.
|Standard Deductions for 2016 Tax Year|
|Married filing jointly||$12,600|
|Head of Household||$9,300|
|Married Filing Separately||$6,300|
|Elderly/Blind: Unmarried||add’l $1,550|
|Elderly/Blind: Married||add’l $1,250|
Common sources of itemized deductions are: mortgage interest, property taxes, charitable giving, high medical expenses, and other miscellaneous deductions.
What is Available
So what opportunities to reduce your taxable income are available if you use the Standard Deduction? Here are some of the most common:
- IRA Contributions (up to $5,500 or $6,500 if age 50 or over)
- Student Loan Interest ( up to $2,500)
- Educator Expense Deduction (up to $250)
- Alimony Paid
- Health Savings Accounts (if you qualify)
- Moving Expenses for job related moves
- Self-employed health insurance premiums
- ½ of self-employment tax
- Numerous education incentives like; Savings Bond Interest, Coverdell accounts, American Opportunity Credit and Lifetime Learning Credit
- Plus numerous credits including; Earned Income Credit, Dependent Care, Child Tax Credit, Retirement Savings, and Elderly Credit
Income limitations often apply to these tax reduction opportunities, but for those who qualify, the tax savings can be significant. This list is by no means complete. What should be remembered is to rely on a complete review of your situation prior to jumping to the conclusion that tax breaks are just for someone else. That someone else might just be you, the Standard Deduction taxpayer.
The Earned Income Tax Credit (EITC) – Are you Eligible?
The Earned Income Credit (EITC) is one of the most common ways Americans reduce their tax bill. Yet per the IRS, 1 out of 5 people who could qualify for the credit do not file for it. Here are answers to some common questions.
The Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) was originally established in 1975 to give low and medium income taxpayers a break on their Social Security taxes while providing an incentive to work. Unfortunately, the EITC is often the subject of missed opportunity as the IRS estimates as many as 20% of taxpayers that qualify for the credit do not include it on their tax return. Here are some things to consider:
Q. Do I have to have children to qualify? Do I have to be married?
A. No. One of the most common errors is thinking the EITC is only for married couples with children. Both single and married taxpayers can qualify for the EITC. Even taxpayers without children may qualify for the credit if they meet certain age, income, and residency requirements. You may NOT, however, file your tax return as “married filing separate” and still receive the credit.
Q. How much can I earn and still qualify for the EITC?
A. If you earned $53,505 or less in 2016 with 3 or more children you could qualify ($47,995 if you are single.)
Q. If I did not earn income can I still get the credit?
A. No, but remember the EITC is a refundable credit. This means you may still receive a refund using the EITC even if you owe no income tax. This is a common mistake made by many taxpayers. You have earned income if you work for someone else (wages and tips), are self-employed, or have income from farming. Nontaxable combat pay for military members qualifies as does some cases of disability income.
Q. How much is the credit?
A. The maximum credit could be worth up to $6,269 to you in 2016. The amount of the credit depends on your filing status (married filing jointly, single, widow, or head of household), your income, and how many qualifying children you have.
Q. What else should I know?
A. A valid social security number is required for you, your spouse, and any qualifying children to receive the credit. It is also important to save information to show you provide support for your claimed dependent. If the IRS thinks you recklessly disregarded the rules and claimed the credit in error, they could prohibit you from receiving the credit for two more years. If the filing was deemed fraudulent, you could be barred from using the credit for 10 years!
Remember to check for your EITC every year. Just because you did not qualify in the past does not mean you can’t qualify for the credit in the future. Many other rules apply, remember to seek a professional review to evaluate your qualifications.
Five Tips for Non-Cash Charitable Contributions
One way to protect the value of your charitable donation deduction is keeping good records. Here are five tips to help ensure your deductions are iron clad.
The IRS is quick to disqualify your non-cash charitable contributions if you do not have adequate records to support your donation. Here are five quick tips to ensure this does not happen to you.
- Get a receipt. Whenever you donate items of value please get a receipt from the charitable organization. It should include the name of the organization, the date of the gift, a general description of the item, and that you received nothing in return for your gift.
- Break out the items donated. Create a detailed list that includes when you acquired the donated item, the estimated value of the item when acquired, and how it was acquired.
- Take a picture of the donation. When itemizing the items to be donated, don’t forget to take a quick photo of the item. Title the photo and place the photo title on the list of items to be donated for cross-reference.
- Create a reasonable value of the donation. Use thrift shop values and online resale values for similar items from sites like e-bay to support your claim of value. Do not forget to provide a statement of condition. Your donated items should be in good or better condition.
- Know when special rules apply. If you donate an item of high value, you may need to obtain an appraisal. Donated vehicles and boats valued over $500 may require an approved Form 1098-C statement from the charity when they sell the vehicle. If they use the vehicle, you will want a print out of value from an approved vendor like Kelly Blue Book or NADA. If the value is over $5,000, you will want to get an independent appraisal of donated items. Donated stocks and mutual funds will need a statement of value from your investment company and from the charity receiving the goods.*
*Special caution: When donating appreciated stocks and mutual funds owned by you for over one year, do not sell the asset. Conduct a direct transfer of the certificates and have the charity sell the investment. This will maximize the value of your donation and avoid potential capital gain taxes.
The IRS recently announced mileage rates to be used for travel in 2016. The Business mileage rate decreases by 3.5 cents while Medical and Moving mileage rates are lowered by 4.0 cents. Charitable mileage rates are unchanged.
2016 New Mileage Rates
Here are 2015 rates for your reference as well.
2015 Mileage Rates
Remember to properly document your mileage to receive full credit for your miles driven.
ow that home values are on the rise once more, it makes sense to review the tax benefits of home ownership.
As always, should you know of someone who may benefit from this information please feel free to forward this newsletter to them.
Tax Benefits of Home Ownership
When it comes to tax savings it really is home sweet home. Here are some of the popular tax benefits of owning your own home and how to get the most out of your home’s tax advantaged status.
|Mortgage interest. Interest paid on your home mortgage is still tax deductible. This deduction is taken on Schedule A as an itemized deduction. Certain upward limits apply.|
|Property taxes. Property taxes paid on your home are also tax deductible as an itemized deduction.|
|Home Equity. Most homeowners can take out a second mortgage on the “equity” in their home. In most cases, this interest expense is also tax deductible. Many use home equity loans for purchasing autos, boats, and the like since interest on traditional loans is not tax deductible.
Idea: Consolidate credit card debt within a home equity loan or home equity line of credit if your home is worth more than your outstanding mortgage balance. You have the double advantage of deducting the interest on your tax return PLUS you avoid the higher interest rate on your credit card. A word of caution however, if you default on a payment your house is now the collateral.
|Capital Gains Exclusion. When you sell your home, up to $500,000 for joint filers ($250,000 for single taxpayers) of the increased value over what you paid for the home can be excluded from tax. To take advantage of this capital gains exclusion you must make the home your principal residence in two of the last five years.|
|Idea: The capital gain exclusion on home sale can be used more than once. For example, you could sell your qualified main home and take the exclusion. If you then made a second (vacation) home your new main home you could also take the gain exclusion once again. You would need to meet the IRS ownership and use rules to qualify. Special allocation rules might apply if this second home was also rental property.|
|Second home benefits. A second home (cabin or vacation home) can also benefit from interest and property tax deductibility as long as total mortgages do not exceed certain limits.|
Should you have any questions regarding your situation please feel free to call.