When it comes to tax preparation you want to find and use all the appropriate avenues that help you pay out less and keep more of your income. To do this, it’s important to pay attention to tax planning all year round. Most tax-saving strategies must be implemented no later than December 31 of that tax year, and often well before that.
Whether certain tax breaks change along with tax laws this year or not, the long-term search for tax advantages is more manageable by thinking about the playing field as having five major categories:
1. Itemizing Deductions
It may seem like an inconvenience, but itemizing your tax deductions can save you money versus taking just the standard deduction, especially if you are self-employed, own a home or live in a high-tax area. Plus, you probably have more items than you think. You can deduct miscellaneous expenses, which include tax-preparation fees, job-hunting expenses, business car expenses and professional dues. This is as long as the combined amount adds up to more than two percent of your adjusted gross income.
2. Maximizing Retirement Savings
Reducing taxable income is one of the best ways to lower your tax bill and doing this by increasing your contributions to a retirement fund is a win/win. First, you are helping to ensure your financial well-being moving forward. Second, in the here and now, the contributions you make to your 401K and IRA plans are tax-deductible and therefore are not included in your taxable income at the end of the year.
3. Making the Most of Home Ownership
You probably know that the interest you pay on your mortgage is tax-deductible. But that interest is also ‘front-loaded,’ so your adjusted gross income at tax time will be significantly reduced for the first number of years of home ownership. Beyond that you also may be able to deduct amounts you paid for mortgage points, mortgage insurance premiums, and other mortgage-related expenses. The same deductions can work for equity line interest too.
4. Capitalizing on Health Care & Education Costs
Currently, if you spend more than 10 percent of your income on medical expenses, you can deduct part of the cost of medical diagnosis, cure, mitigation, treatment, or prevention of disease and treatments affecting any part or function of the body. Also included are insurance premiums, devices, and long-term care. Even the expense of getting to and from medical treatment is deductible, and you may be able to deduct the medical expenses of a dependent.
For education, the costs related to student loans, tuition and fee can be claimed as deductions. Plus, eligible current students, including lifetime-learners, can access certain credits for tuition.
5. Going Green & Charity Giving
Installing alternative energy equipment – including solar electric systems, solar hot water heaters and geothermal heat pumps – in your home qualifies you for tax credits. Currently, homeowners who put in solar energy systems will realize gains of up to 30 percent of the cost of installation in addition to saving on utility bills. This credit will begin to decrease after 2019 so the time to act is now.
Donations to charity can be used as itemized deductions. To do so it is important to save receipts and documentation. Furthermore, if you have a sizable gift in mind you might want to consider giving appreciated stocks or mutual fund shares instead of cash. This has two benefits. First, your charitable contribution deduction registers as the fair market value of the securities on the date of the gift, not the amount you paid for the asset. Plus, don’t have to pay tax on your profit.
6. Get Professional Advice
These are all useful areas to find tax breaks, but no matter how much research you do, professional investment and estate planners can identify tax deductions and tax credits that you haven’t unearthed. The professionals at Caldwell Trust are available year-round to guide you all of the details.