The holiday season includes some less-than-pleasant traditions: mall traffic jams, email spam, petrified fruitcake – and last-minute tax adjustments. Now that Congress has finally passed (again) the body of popular tax break extensions for another year, everyone can concentrate on the actions needed to reduce the potential IRS wallet impact next April.
As always, you’re bound to see at this time of year one list of tax tips after another. There’s just one problem. No one person’s finances are the same as another’s – and two people probably can’t apply the same tips the same way.
Do a dry run. Doing taxes once a year is bad enough unless you’re a CPA and getting paid for it. So why would you want to look at them now? One excellent reason: Your specifics will dictate exactly what you need to do and standard rules-of-thumb advice won’t make it. “You need to run a baseline,” said Mark Steber, chief tax officer for Jackson Hewitt Tax Service. “It doesn’t have to be overly complicated, but it should be as complicated as your tax situation is.”
Someone, for example, might come under the Alternative Minimum Tax this year and next year see a heftier tax bill because of a passive loss. The standard advice to accelerate deductions and delay income may be counterproductive. “It [may make] sense to pull income into the 28 percent tax rate rather than the 39 percent you might be at [in 2015],” Steber said. Similarly, moving as many deductions as possible into next year may be the wise course in the long run.
The dry run will also help you recognize how life events such has marriage or divorce, the birth of children, the end of college, starting a business, or taking care of a dependent parent might affect your tax obligations.
Check the state of your house for itemized deductions. The aftermath of the Great Recession is still dogging home values. That has big implications for taxpayers. “Some people have low balances in mortgage or low property taxes and a lot of people have seen their taxes go down after the real estate bubble,” said Manuel Pravia, a principal in the tax and accounting department of Morrison, Brown, Argiz & Farra.
Because mortgage interest and property taxes are major drivers of itemized deductions, too few could mean you’re stuck with standard deductions. Prepaying property taxes or mortgage payments might prove to be a wise move.
Double-check your medical spending plans. Pravia also suggests reviewing your medical flexible spending account, or FSA. They can be great, letting you cover expenses without a tax burden, but at the end of the year you lose any money that was left over. See what expenses you might be able to squeeze in this year if you still have money in the account. That could include tests, glasses, or elective procedures – even batteries for hearing aids. If you find yourself wasting money, see if you can change the withholding amount for next year, unless there’s a big medical need you can anticipate (deadlines vary by company).
As Bankrate.com notes, there is a new $2,500 limit on the maximum FSA contribution, which came in as part of the Affordable Care Act.
Shift your adjusted gross income. One potential problem with medical and dental expenses is that they must top 10 percent of your adjusted gross income, or AGI, to be deductible. Miscellaneous expenses, like business expense claims, must be more than 2 percent of AGI. This is a case where taking steps to lower your AGI can be helpful. The lower the AGI, the smaller a hurdle a given percentage is.
Rebecca Pavese, a CPA and financial planner with Palisades Hudson Financial Group’s Atlanta office, notes how shifting AGI can also open up deductions and exemptions that you might otherwise miss. “If you can lower your AGI to below $73,800 for a married filing joint or $36,900 for a single filer, you’ll pay 0 percent on long-term capital gains from sales of assets held longer than a year and 0 percent on dividends,” she said.
Shifting the AGI means maximizing so-called above-the-line deductions, including health insurance expenditures for self-employed people, IRA contributions, health savings account contributions, and moving expenses.
Look at every possible deduction. People often miss large areas of potential deductions. Between 20 percent and 25 percent of people eligible for the Earned Income Tax Credit (EITC) fail to take it, for example, which means they unnecessarily spend money. Even if you’re far above the EITC qualification line, there may be other areas you’ve missed. If you’re 50 or older by the end of the year, you could contribute an additional $5,500 to your 401(k) plan over and above the normal $17,500 limit.
States can have their own tax reduction opportunities as well. If you live in Georgia and lease an electric vehicle for two years, you can get a state tax credit, says Seth Deitchman, a financial advisor with the Mercury Group at Morgan Stanley. Deducting up to $2,500 to the Georgia Private School Scholarship fund can translate into a state tax credit and a federal tax deduction.
There’s a lot you can do to limit your total tax bill. Now, before the new tax season sweeps professionals up, is the time to get help, do some planning, and take some action.
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