10 essential tax tips

Steven Leibold, EA CEO

Copyright (c) Steven Leibold, All Rights Reserved

For over a decade, Steven Leibold has dedicated his career to the tax and accounting field. Steven takes pride in advising, representing and preparing returns throughout the year for individuals and business owners. His expertise in business tax and accounting make him a valued resource and trusted advisor among his clients. Steven devotes his time advising business owners on a variety of key planning decisions, such as selecting an appropriate business entity type, choosing the right business retirement plan, as well as providing day-to-day consulting to help them stay on track with their business goals. He believes that proper planning leads to a successful business, which ultimately results in a successful retirement.

Steven Leibold, EA


10 Essential Tax Tips for Individuals

Introduction

Tax law is very complicated. It is one of the largest

volumes of books ever created. To make it even

more complicated, many parts of the tax law have

expiration dates unless Congress takes action to

extend them or to make them permanent. In fact,

most of the tax legislation is put into effect for only a

period of time to accomplish what the controlling

parties are interested in accomplishing, then are set

to expire once they believe it has met their goals.

Regardless of your political belief, taxes are here to

stay.


Introduction

I always tell clients that there is always something in

the tax law that can work to your advantage.

Whether it is putting more money away for retirement

or adding a dependent to your tax return that you are

supporting, there are many possible alternatives to

help reduce your tax liability. Will it cost you a little

extra to get those savings, perhaps. Depends on

what you are doing to reduce your liability.


Introduction

Tax law requires that you pay your fair share of taxes

based upon your specific facts and circumstances

and of course, tax law. A simple change in how you

spend some money could help you reduce your tax

liability. For example, paying rent to a landlord is not

tax deductible. But, if you are in a situation where

you can purchase a home and go from paying rent to

paying a mortgage, you can save thousands of

dollars.


1: Purchase your home

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Yes, it can be a very expensive endeavor up front, but the tax savings are substantial. When you purchase a home, you are buying a very valuable asset which hopefully over time will appreciate and you can sell later on at a gain (possibly tax free if the gain doesn’t exceed

certain amounts). When you purchase your home, the points you pay for the house are tax deductible. You also can deduct the mortgage interest you pay on the home along with the property taxes you pay on the home. Now you will no longer simply take the standard deduction based upon your filing status.


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You will complete a Schedule A – Itemized Deductions. With this form, your medical costs (after tax dollar amounts) may be tax deductible, sales tax paid OR income tax paid to your State of residence, personal property taxes (auto, boat, airplane, etc), charitable contributions, along with employment related expenses and a handful of other miscellaneous expenses. These all add up significantly and usually result in a sizeable reduction in personal income tax liability.


2: Correctly List Your Dependents & Filing Status

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People usually never forget to include their children as dependents on your tax return. However, did you know you could also claim your parents, siblings, nieces and nephews, and other family members on your tax return as well? Now there are rules you need to follow. You must provide over 50% of their support annually. In most instances they must live with you. They also cannot earn over a certain dollar amount annually.

If they do meet these requirements, you can claim them as a dependent and take their dependent exemption on your tax return. If you are unmarried, you can also change your filing status from single to head of household – another real nice tax reduction.

You should make sure you are not in violation of the rules, but the time spent talking with a professional is well worth the tax savings.” Steven

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If you qualify for a tax credit, in the majority of instances, the credit is far better than the deduction. There are many tax credits available to individual taxpayers. Some of the refundable credits routinely claimed by taxpayers are the earned income tax credit, the additional child tax credit, and the refundable portion of the American Opportunity tax credit. These can result in significant tax savings and put more money back into your pocket.

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3. Tax Credits vs. Tax Deductions

Other tax credits are available but are not refundable. Those included business tax credits if you are self employed, the child tax credit, foreign tax credit, energy efficient tax credits (solar) and many others.

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Each year I meet with clients to complete their tax return and we discuss the tax savings available by participating or contributing more to their company 401(k). Several will respond they don’t

wish to put more away because their employer will not match it. So? If you are looking for tax savings, your employers 401(k) or a retirement plan is a great place to do so. The limits usually increase annually by $500. While you may be limited on the amount you can contribute based on some calculations by your employer, if you can afford to put away more, you should max it out if you can. It not only gives you a great tax benefit now, your earnings in the plan grow tax deferred until you cash it out.

4. Maximize Your Retirement Savings

While the contributions into a ROTH style retirement plan are not tax deductible when you make the contribution, they grow tax deferred and when they are withdrawn the principal and EARNINGS come out TAX FREE! That is free money at your retirement. Again, not a bad option.

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5. Contribute to a ROTH IRA or ROTH 401(k) If You Can

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The benefits of the ROTH are many. The younger you are, the longer it grows tax deferred, and potentially the larger sum of money you can draw at a later date due to compounding growth. You also do not have to start withdrawing the funds at the age of 70 ½ like you do for other retirement plans. As with any investment, the longer you do it and let it grow the larger the value becomes.

As with any investment, the longer you do it and let it grow the larger the value becomes. When choosing this option there is one item you do need to keep in mind – tax laws change. While the law at the moment favors the ROTH type of plan and all funds come out of the plan tax free, the tax law may change at a later date. Social security was not supposed to be taxable ever, but now up to 85% of social security can be subject to income tax. Something to keep in mind.

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Pay 100% of last year’s tax

liability to avoid penalty – Many people pay hundreds to thousands of dollars in tax penalties each year. This is free money for the government and can cost you substantially. The tax law safe harbor says if you pay in at least 100% of your prior years tax liability for the current year, you will not be penalized if you owe additional money at the end of the year when you file.

This means you need to be vigilant and adjust your withholdings accordingly for life changes. Don’t be caught off guard by

changes in your tax liability due to changes in your circumstances. Keeping up on this help save you money in the end.

6. Stay in Compliance

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Borrow money tax-wise – Only mortgage interest, student loan interest, and margin interest are tax deductible. Let’s address all

three at this point.

Student loan interest – only a total of $2500 can be deducted per year subject to income limitations. These limitations can be a serious issue for many taxpayers because by the time you get out of school and get a job, you potentially end up making more than the law allows and now you are paying on a debt that is not deductible. Not an attractive option, but remember it may be tax deductible.

7. Borrow Money Tax-Wise

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Margin Interest- this is interest that is paid on a loan through a brokerage account. The draw back to this type of interest is it is limited to investment income. If you own a portfolio that is more interested in growth vs. income, you may end up with a lot of suspended margin interest that is not deductible until you sell stock and have a gain, or earn interest and dividends. Again, not a great option, but it is deductible and something you do not want to forget.

Mortgage interest – there are 2 types of mortgage interest – Acquisition Debt and Equity Debt. You can deduct the interest on Acquisition Debt of up to $1,000,000. You can deduct the Equity Debt interest on up to $100,000 of debt. So, that allows you to take a deduction for mortgage interest on up to $1,100,000 of debt. If you borrow more than the $1,000,000 then we would need to adjust what was deductible. Same thing with equity debt. You can take out up to $100,000 of equity from your home and deduct the interest, but go over the $100,000 and you now have a portion of non-deductible personal interest.

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Capital gains rates are at their lowest. They are 0 – 15% depending on your regular tax rate. However, to get these preferential rates they must be long term capital gains. That means you must hold the property for 366 days (1 year + 1 day). If you sell before then, no preferential capital gain treatment. So long term investing has its benefits.

8. Sale of appreciated assets

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Tax law allows you to sell your home for a gain of $250,000 for single/head of household and $500,000 for married filing joint filers and pay no tax on that gain. In order to qualify for this exclusion, you must make this home your primary residence for 2 out of 5 years. The 2 years do not need to be in sequence and you can move out of the home and rent it for a bit before selling it and still get this tax gain exclusion.

9. Sale of Your Primary Residence

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This can also work if you would like to sell a rental property. If you move back into the rental as your primary residence for 2 years, you now qualify for the exclusion on that home. Of course you do need to recapture and pay taxes on the depreciation claimed over the years it was a rental, but you still save significantly. Some other item to consider, there are exceptions to the rule of 2 out of 5 years – but make sure you qualify before you jump and sell. You can also only do this once every 2 years, so don’t sell one house in one year then sell another the

following year. You will pay tax on the gain of the second home sold.

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This is a great tool to save money when selling rental real estate or investment property. In essence, what you do is take the gain on the sale of the first property and lower the basis in the property being bought to replace it. So, all you are doing is “kicking the can

down the road” in regards to

the taxes.

10. Tax Deferred Exchange

Now, you can get around the taxes completely if you hold until you pass and your heirs inherit the home and can get a basis step up, but that may be thinking way too far down the road. There are rules to follow and you need to follow them exactly to make this strategy work, but there are many professionals available that are available to assist you with handling the transaction to give you the best chance of success.

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I hope you have found these tips helpful and informative. If you have any questions or need some assistance with your taxes, feel free to give me a call or e-mail me. I would love to be able to help you out. Steven C. Leibold, EA

619-294-4286 x351 [email protected]

If you’re interested in tax situation, request a personal consultation

Visit Our Website www.sdbizadv.com


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10 essential tax tips

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