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5 Commonly Overlooked Deductions
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| 1. If you are caring for a friend, you can deduct
their personal exemption. |
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This tax break is for anyone supporting a friend
financially. You may be able to deduct your friend's personal exemption of
$3,300 on your own income tax return as long as these requirements are met;
(1) You provide more than one half of your friend's
support during the year,
(2) your friend is a member of your household for the entire year,
(3) your friend's income is less than the exemption (less than $3,200) and
(4) your friend is a U.S. citizen or resident.
Why should your friend let you use his or her personal
exemption on your income tax return? Because when people have little or no
income, their standard deduction, by itself, is large enough to squash any
income tax they might owe. They eliminate the possibility of their exemption
going to waste by giving it to someone else. Contact us to find out if this
trick applies to you.
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2. You can use your credit cards for year-end tax planning. |
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Since effective tax planning takes into account not
only what you spend your money on but on when you spend it, you should
always think about timing your tax-deductible expenses. Look ahead to the
end of the year and consider deductible contributions to retirement plans
and estimate your state income tax payments along with your tax-deductible
purchases. The idea is to pay for them in the order that minimizes your
income tax and maximizes your positive cash flow. Again, timing is everything. A credit card can give
you the tax deduction that you need at year-end. If you charge a
tax-deductible purchase to a bank credit card--not a store card--you can
easily take the write-off (even though the credit card charges will be paid
after the end of the year).
Note: Try and use your card after you have already
planned your current cash flow around other deductions.
There are many different options for using this
strategy and they differ between employers and employees. We recommend you
call today to find out exactly what your options are.
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3. There is a way around your current home equity deduction limits. |
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A deduction for the home equity interest you already
pay can mean big tax savings! Ordinarily, this interest deduction is limited
to home equity debt of $100,000 or less. Don't shortchange yourself! Hidden
in the IRS regulations is a way for you to increase your home equity
interest expense and deduct more than is ordinarily allowed. You qualify for
these savings if you use a portion of your household for business purposes,
rent out a portion of your home, or if you use a part of your house for any
other business reasons. The end result is that most taxpayers are stuck with
deducting home equity interest only up to the $100,000 debt limit. Don't
feel "stuck" if you use a portion of your home for business. All you have to
do is make a special IRS election to treat your home equity debt as
something other than home equity debt. Doing this lets you take a bigger
home equity interest deduction.
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4. Did you know you can use your previously funded IRA to fund the
current year's deductible contribution? |
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Well, you can. If you don't have enough cash to make a
deducible contribution to your IRA by April 15th, here is how you can still
take the tax deduction and have until June 12th to make the full $4,000
contribution! To get started, all you need is an IRA funded in previous
years. Start by having $4,800 distributed to you from your
IRA on April 15th. Your bank is required to hold 20% (income tax
withholding), so you'll actually receive $4,000. Once you have the $4,000,
immediately deposit it back into your IRA. If you do this before April 15th,
this counts as your deductible contribution for the year.
The best part of this is that you have 59 days to
"make up" the withdrawal-or to be taxed. Simply redeposit $4,800 into the
same IRA account by June 12th. This "rollback" deposit lets you avoid the
tax on the original distribution made to you. This is a type of short-term
loan from your IRA to make this year's deductible contribution before the
April 15th due date.
Note: Not all banks realize it is required to withhold
the 20% from the original $4,800 withdrawn from your IRA. Call to find out
which way we can help you work with this "extra" amount. There are many
options, so get informed before you miss out on the full benefits of your
retirement plan.
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5. You can take distributions from your IRA without paying the 10% early
withdrawal penalty. |
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We all know that our best bet is to try and keep our
retirement savings until we retire. There might be situations that arise
where you'll need to make early withdrawals from your IRA (like helping to
pay for your child's education or caring for an elderly parent). Making
these early withdrawals puts you at risk of the early withdrawal penalty.
This penalty can seriously add up over time and can shrivel your hard-earned
retirement plan. No matter how old you are, there is an income tax on
any distributions from your IRA. But fortunately, there's a way around the
10% early withdrawal penalty. You can use an IRA annuity that sets you up to
make withdrawals (the size is based on life expectancy tables provided by
the IRS) until you are 59 1/2. You have to make withdrawals for a period of
five years. You can continue to make withdrawals, or wait, to when you are
70 1/2. At that point you have to start making withdrawals anyway. So it is
a flexible plan we can help tailor to your needs.
This strategy works very well for people in their 50's
who have unusual expenses to meet, but do not want to be forced into
withdrawing everything from their IRA before retirement.
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