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.
Often during an audit, what you thought was a qualified deduction to a charitable organization is ruled non-deductable. How can this happen? Here are some hints to make sure your charitable contributions are put to good use, both at the charity and on your tax return.
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 web sites 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 web site 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.
Want to reduce your taxable income using a tax deferred contribution to an IRA but don’t have the funds to do so? If you expect a tax refund, here is a technique that may help.
Here is a tax planning tip for those who file their tax returns early and wish to contribute to a tax deductible IRA, but do not have the funds to do so.
Say you want to pay into an IRA to get a tax break but you don’t have the money? Take heart, there are ways to get around this. The IRS allows you to take the deduction now and pay later when you get your refund.
How it works
Step 1: Prepare your tax return early in the year (early February). Run the tax return considering an income reducing contribution to a tax deferred IRA. If you do not have the funds to put into the IRA, but your tax return has a refund that can fund your contribution, you are ready for step 2.
Step 2: File your tax return with the IRA contribution noted. File the tax return as early as possible to ensure your refund gets back to you prior to April 15th. E-file the return if at all possible.
Step 3: Fund your IRA prior to April 15th. Tell your IRA investment firm you wish your IRA contribution to be for the prior year.
That’s it. You have now effectively had the income reduction benefit of your IRA contribution help fund the account through your tax refund.
Timing is everything. If you use this technique it is critical that the IRA is funded on or before April 15th. If it is not, your tax return will need to be amended.
Refund not received in time. If you do not receive your refund in time, you may not have the funds to make a timely IRA deposit. In this case, you may need to borrow funds on a short-term basis until the refund is received.
No extensions. The IRA contribution for the prior year must be made by April 15th of the following year (the original filing due date). This is true even if you file your return under an approved extension period.
While not for everyone, this tax tip could help you fund more of your retirement on a tax deferred basis.
With the re-introduction of itemized deduction phase-out, does it still make sense to contribute to charities? For most taxpayers, the answer is a resounding yes. Continue to make charitable contributions. Here is what you need to know.
In 2013 federal tax legislation reintroduces the phase-out of itemized deductions for certain taxpayers. Because of this, many who are subject to itemized deduction phase-outs wonder if the benefit of charitable giving is reduced. Here is what you need to know.
- Most taxpayers are not impacted. The phase-out of itemized deductions for 2013 is based on Adjusted Gross Income (AGI) in excess of $250,000 for single filers, $300,000 for joint filers ($150,000 for married filing single), and $275,000 for head of household. So if your income is below these amounts your itemized deductions will not be reduced because of the new phase-out rules.
- Alternative Minimum Tax (AMT) does not impact charitable giving.If you have been subject to the AMT in the past, please note that charitable giving generally does not impact this alternative tax calculation. Other things like state taxes and property taxes are a couple of items that do impact this alternative tax calculation.
- The phase-out calculation is based on income not deductions. This means that unless you are in a low or no tax state your charitable deductions will probably not be impacted by the deduction phase-out. Why? The itemized deduction phase-out amount is based upon your income. Say, for example, the phase-out calculation will reduce your itemized deductions by $8,000. Income required to produce this phase-out amount will also generate state taxes in most states in excess of this amount. Therefore the phase-out reduction will almost always be absorbed by your state income taxes.
“Are there cases when the phase-out will eat up a lot of your charitable giving? Yes, especially in no or low tax states. Because of this risk it is a good idea to review the phase-out impact on your situation as soon as possible. Otherwise, you might be foregoing an opportunity to reduce your tax liability this year with planned charitable giving.”
What you need to know to ensure your allowable business, charitable and medical miles are not dismissed during an audit.
The tax code allows deductions for qualified miles driven for business, medical, moving and charitable purposes. But to claim this deduction you must keep adequate records of actual miles driven. During an audit this is an often disallowed deduction, despite the fact that you actually drove the distance claimed. How to make sure this doesn’t happen to you? Here are some tips.
- Keep a log. The tax code is clear on this point. You may not estimate your miles driven. You must support your claimed deduction, ideally with a detailed mileage log.
- Create good habits. Your odometer reading and miles driven should be noted as soon as possible after the event. Keep a log book in your car and note the miles each day. Logs created after the fact with estimated miles driven could be disallowed during an audit.
- Make thorough entries. Note the odometer readings, date, miles driven, the to/from locations, and the qualified purpose for the trip.
- Don’t lose out on the extras. The deduction for miles driven is meant to provide a deduction for fuel, depreciation, and repairs. You can also deduct out-of-pocket expenses for tolls, parking and other transportation fees. Keep a running total of these fees in the back of your mileage log.
- Keep separate logs for each deduction. Remember you may deduct mileage for business, charitable purposes, qualified moving and medical miles. It is best to keep track of each in a separate mileage log.
- Alternative business transportation deduction. When it comes to deducting business transportation expense, remember the miles driven method is not the only one available to you. You may also deduct your actual expenses, but how and when you make this determination is important. In the initial year of placing your auto into service for your business, it is best to keep track and record all your actual auto expenses. An analysis can then be conducted to see which method is best for you to maximize your deduction.