TAX TIP 1 – Retirees
- Beyond the usual deductions and credits, there are ways to reduce taxes after retiring. Take retirement accounts, for example. Strategists at PRW Wealth Management tell bankrate.com that the biggest shock to retirees is that every dollar they take out of their traditional IRAs is going to be taxed at some level.
- Investing in different retirement accounts, including traditional and Roth IRAs, can give seniors more flexibility.
- Retirees need to choose tax-efficient investments, which provide income — in the form of interest, capital gains and dividends. The returns on various types of investments are treated differently at tax time. And care must be take to avoid being hit with a tax bill.
- Older investors in the highest tax bracket may want to consider master limited partnerships or real estate investment trusts. Life insurance comes with a tax-free death benefit that will help your heirs. But experts warn that taking cash from a policy will reduce what is left to your family.
- And finally, retirees may want to consider moving to a tax-friendly state. Florida, Nevada, Tennessee, Washington and Texas are among those with no state income tax.
TAX TIP 2 – Job Hunting Expenses
- If you looked for a new job in 2014, you’ll be able to deduct some of your job hunting costs. You can write off the cost of preparing and mailing resumes — this includes supplies and stamps.
- You can also deduct some employment agency fees if you’ve used one — and any travel you’ve done to look for a new job in your current line of work.
- Job hunting expenses are tax-deductible if you itemize and total miscellaneous expenses exceed two percent of your adjusted gross income.
- But just a remember, the deduction is for job seekers who searched for a job in the same line of work, and excludes first time job hunters.
- If you worked out of your home office, you could qualify for a “home office deduction”. Use the “simplified option” rather than filling out a long form and calculating a percentage of household expenses.
- Just deduct five dollars for each square foot of space you use as an office, up to 300 square feet and a maximum deduction of 15-hundred dollars.
TAX TIP 3 – Earned Income Tax Credit
- Low and moderate income families should check to see if they’re eligible for the earned income tax credit. A married couple with three kids, for example, could get a maximum credit of $6,143 on their 2014 return. Even if you didn’t get the EITC last year, you may qualify this year.
- If you’re a same sex-couple wondering whether to file as a joint return or file as a married couple, keep in mind the IRS issued new rules that treat legally married same-sex couples as married for federal tax purposes. Prepare taxes both ways to see which one is best for your situation.
- Also, same-sex married couples have the opportunity to go back and amend their last three years of tax returns, if they have money owed to them. An amended tax return generally allows you to file again to correct your filing status, your income or to add deducations or credits you may have missed. Check with your tax advisor to see if amending would be best.
TAX TIP 4 – Electronic Filing
- Filing electronically is usually the fastest and easiest way to submit your tax return. And if Uncle Sam winds up owing you money, the IRS says you’ll get your refund much faster if you file electronically and request direct deposit.
- Identity theft is often a major concern, just be careful. Earlier this year Turbotax briefly suspended filing state tax returns due to fraudulent activity. Although the problems were resolved, the IRS recommends filers stay vigilant. Reach out to them if you suspect any kind of suspicious activity.
- And if you get an unsolicited text or email from the IRS — that’s a serious red flag. The IRS does not initiate contact with taxpayers by email to request personal or financial information. If you get an unsolicited email that appears to be from the IRS, please report it by sending it to [email protected].
TAX TIP 5 – Same Sex Couples
- Most important….same sex married couples can now file joint tax returns…potentially saving thousands of dollars. If couples who were married but filed individually in 2010, 2011, or 2012 should consider going back and amending past returns and file jointly instead.
- Same sex married homeowners should keep in mind that couples can exclude up to $500,000 in taxes from the sale of a primary residence. Single taxpayers can only exclude up to $250,000.
- Same sex couples can also give unlimited tax-free gifts to their spouse. While this seems like it would only impact high earners, it also means that products like individual retirement accounts can be given to a spouse without incurring any tax penalty.
TAX TIP 6 – 2014 Tax Law Changes
- Personal and dependent exemptions increase to $3950. The 2014 standard deduction is $6,200 for a single tax payer and $9,100 for a head of household.
- For married couples filing jointly, the standard deduction is now $12,400.
- Don’t have health insurance? You’re going to have to pay a penalty. Under the affordable care act. This year those penalties could total as much as 1 percent of your 2014 household income — and goes up to 2 percent for 2015. Many exemptions are available to avoid the penalty. Find more info at healthcare.gov.
TAX TIP 7 – State Taxes
- The state sales tax. This tax break is still alive and well – at least for your 2014 return – and can be especially beneficial if you live in a state that does not impose a state income tax.
- Congress offers tax filers who itemize their tax return the choice of either deducting state income tax or state sales taxes they paid last year. You choose whichever gives you the largest deduction.
- In some cases, even filers who pay state income taxes can come out ahead with the sales tax choice. The IRS has tables that show how much residents of various states can deduct, based on their income and state and local sales tax rates.
- But the tables aren’t the last word. If you purchased a vehicle, boat or airplane, you may add the sales tax you paid on that big-ticket item to the amount shown in the IRS table for your state. The IRS also has a calculator that shows how much residents of various states can deduct, based on their income and state and local sales tax rates.
TAX TIP 8 – 529 Savings and Student Loans
- If you have a 529 college savings plan that you put to work in 2014, make sure to get a form from the school that reports qualified expenses paid by or on behalf of the student. Keep receipts and copies of checks for any contributions so you have proof of who made contributions and when if you need it.
- Also, if you’re a parent paying off your child’s student loans, your child can deduct the interest on those loans.
- Generally, you can only deduct interest if you are legally required to repay the debt. But if parents pay back a child’s student loans, the IRS treats the transactions as if the student were paying them off. So as long as the child is no longer claimed as a dependent, he or she can deduct up to 25-hundred dollars of student-loan interest paid by mom and dad each year. No need to itemize to use this money-saver.
TAX TIP 9 – Charitable Donations
- Donating to a ’cause” isn’t enough. It needs to meet IRS guidelines. Make sure your donation is to a qualified charitable organization, religious group, private foundation or other non-profits such as the red cross, the girl scouts, a museum or volunteer firefighters.
- Get proof of your donation. Obtain from the charity a form or statement showing the group’s name, the date and the amount of the donation in order to itemize it.
- If you’ve cleaned out the attic or the garage, household goods including furniture, electronics, appliances and clothing that are in decent condition can be given to charity and claimed as a tax deduction.
- For more expensive donated items worth $5000 or more, include a professional appraisal with your tax return.
- Special rules apply if you give a car, boat or airplane to charity. Specifically, according to the wall street journal, your write-off depends on how the donated vehicle is used by the charitable group. And the group accepting the vehicle turns in paperwork both to the donor and the IRS.
- Finally, consult an accountant before making any big charitable gifts in hopes of getting a big tax deduction. Deductions for large donations can face limitations.
TAX TIP 10 – Deducting Interest Payments
- At least some of the interest you pay out each month may be tax deductible. For example, you are allowed to itemize the interest paid on up to $1 million worth of mortgage debt or to make improvements to your main personal residence and one other home. If that second property is a vacation home that is rented out, the tax rules for getting a deduction get more complicated.
- You can also claim an itemized deduction for interest on home-equity loans of up to 100-thousand dollars regardless of how the money was spent.
- For students or families with college-loan debt, there’s a tax break of up to 25-hundred dollars on the interest. But there are limitations, and for high-income households, the wall street journal says to consider taking out a home-equity line instead of a student loan…since the interest most likely can be deducted.
- Then there’s investment-interest expenses, which can be deducted. Irs form 4952 helps you to calculate your write-off. And you can indicate how much of your long-term capital gains and dividends you want treated as investment income.
- Some areas where you’re not likely to get a tax break: interest on 401(k) loans, plus car loans, credit cards and other consumer debt.
TAX TIP 11 – IRS Audits
- The IRS — dealing with budget cuts — last year had the smallest number of audits in a decade. And there could be even fewer in 2015.
- 1.2 million individual tax returns came under scrutiny by the IRS in 2014. That amounts to less than one percent of the tax returns filed.
- The IRS is down more than 2200 Revenue Agents since 2010 and the number is expected to decline again this year. But fewer audits won’t necessarily make it easier for tax cheats. Your employer reports your wages to the IRS. Your bank tells the agency about your interest income. And your lender tallies up the interest you paid on your mortgage.
- Plus taxpayers must make note on their returns whether they have health insurance. However, if you operate a business that deals in cash…with income or expenses that are not independently reported to the IRS…your chances of getting caught are lower than they have been in years.
- For all taxpayers, the IRS estimates that half of all people who call for assistance this filing season won’t be able to get through to a live person. And the IRS may shut down for a couple of days after tax season, resulting in service cuts.
TAX TIP 12 – Getting Your Biggest Refund
- Experts at Jackson Hewitt — the nation’s second-largest tax preparation service — say millions of Americans aren’t getting their biggest possible refund…because they don’t know all of the credits they’re eligible for. One of the biggest missed by 1 out of 4 families is the earned income credit — leaving up to $6200 dollars on the table.
- Plus, according to Kiplinger’s, savvy taxpayers can work on reducing taxes all year round. If you’re getting a big refund, you’re having too much in taxes taken out of your paycheck. So file a new W-4 with your company. Also boost your retirement savings. Your contributions to to a 401(k) or similiar retirement savings plan are not counted as taxable income.
- Think green. Homeowners who install solar electric systems or hot water heaters, wind turbines and other alternative energy equipment are eligible for a tax credit through 2016. The stork brings tax savings. Giving birth to or adopting a child will knock close to $4000 off your taxable income
- Finally, when the paperwork is all filed out, get that refund much faster by e-filing your tax return. Electronic filing also reduces common mistakes such as math errors.
TAX TIP 13 – Farmers and Livestock
- Farmers and ranchers who were forced to sell livestock due to drought have more time to replace their livestock and defer tax on any gains from the sales. Ordinarily, livestock must be replaced within a four year period. But the IRS is granting a one-year extension.
- The extension generally applies to capital gains realized by farmers and ranchers on drought-related sales of livestock held for dairy or breeding purposes. Sales of all other livestock, such as those raised for slaughter or sporting purpose, and poultry are not eligible for tax relief.
- The relief is extended to 30 states that suffered extreme or severe drought conditions between September first 2013 and August thirty first of 2014. This includes most of northern California.
- In most cases, the IRS says farmers and ranchers whose replacement period for drought sales was scheduled to expire December thirty first now have until the end of 2015. For more information go to www.irs.gov.
TAX TIP 14 – Single Parents
- There are tax breaks that favor single parents. Single filers who make less than $75,000 a year may be eligible for the child tax credit for kids under 17. It can decrease a parent’s taxes by up to one thousand dollars per child.
- Single parents can also file as Head of Household, which could cut how much they’ll pay in taxes. To qualify, the single parent must pay more than half of the household expenses and the child must live with them more than six months of the year. And usually the parent with custody can claim the child on their tax return.
- Parents who have a job or are looking for work can also claim dependent care expenses for children 12 and under…up to $3000 for one child…$6000 for two or more.
- According to gobankingrates.com, the exemption is meant to ease the financial burden of caring for a child. It reduces your taxable income and sometimes results in a greater refund.
- As far as child support, it is not considered to be taxable income. And if a parent paid child support, those payments are not deductible. But — alimony does count as income when filing taxes, while the ex-spouse paying alimony can claim a deduction.
TAX TIP 15 – Tax Frauds and Scams
- One of the scams involves a phone call from someone claiming to be from the IRS saying you owe money — and to pay via a pre-loaded debit card or wire transfer. Or he might say you’re due a refund and ask for personal information like your social security number
- The crook may even provide a phony IRS employee badge number, and caller ID may have been altered to make it appear the agency really is calling. But don’t fall for it. The IRS does not call to demand immediate payment, nor does it ask for debit- or credit-card information over the phone. It mails invoices about taxes owed and the IRS does not threaten to have you arrested.
- There’s an email version of the same scam, with cyber-criminals phishing via fake IRS links.
- Fraud often pops up after a tragic event, with e-mails or phone calls asking donors to contribute to non-existent tax-deductible charities. Some scam artists pose as tax preparers and promise large refunds. According to gobankingrates.com, they prey on those with limited English or others who are vulnerable and take the victim’s refund or charge hefty fees.
SOURCE: Westwood One/CNBC Radio