About tax time each year, a recurring nightmare visits a friend of mine; let’s call him Bill. He takes a shoe box crammed with carefully collected receipts to his tax adviser. When he opens the box, there is nothing inside but his Florsheim wingtips or a pair of his wife’s “fashionably strappy” Manolo Blahniks. The tax adviser glares, while Bill drops the shoe box and rifles through his briefcase. Where are the receipts he has stuffed into pockets, tucked into desk drawers, saved diligently for months?
Although Bill always awakens with both his shoes and his receipts intact, he complains to me that receipts are just part of the dreaded “tax stuff” that he and the rest of us scramble to collect before the tax adviser’s “last call.” My best advice as tax season looms is to relax, take a deep breath and then put strategies into place to minimize your tax rate, maximize your savings, and, well, you know the rest. Here are some reminders that may help.
Look at the big picture of what happened during the year. Several important planning items are sometimes overlooked:
- Miscellaneous unreimbursed business expenses can add up. Keep those receipts—a shoe box works fine. Did you know that dry cleaning and laundry costs, a justifiable deduction while on a business trip, are also deductible for the first dry cleaning and laundry bill when you get home?
- Inform your tax adviser of any change in marital status or dependents—it is not always common knowledge that you have divorced, remarried, had triplets, or had your mother-in-law move in with you.
- You can take the deduction on your current year tax return for contributions to a retirement account if you are self-employed, but you do not have to contribute the money until October 15th of the next year!
- Pay your January house payment in December to get an “extra” deduction; after all, you have to pay it sometime.
- For each child under 17 years of age, you may qualify for the child tax credit of $1,000.
- Understand child support versus alimony. Alimony is a deductible for the payer and taxable income for the receiver. Child support is neither.
- If you had a child start college this year, you may qualify for education credits (tuition, fees, etc.). Do not forget, the child must attend school for at least half the year.
- Has your income materially changed this year? Did you start receiving Social Security, IRA distributions or retirement income? Did you sell any appreciated stock? Check for possible tax advantages.
- Did you win more than $600 in the lottery? Even before you receive your winnings, they may be taxable. Likewise, you can report the costs associated with your winnings. So keep those losing tickets and receipts, just in case you win!
- Keep receipts for travel to and from your broker’s office and investment sites, bank fees and safety deposit box rentals, and for subscriptions to investment related publications. Warning—Wine Spectator and Cigar Aficionado do not generally qualify!
- The IRS allows taxpayers to deduct amounts paid for smoke cessation programs, but not for weight loss programs that might be necessary after you quit.
- If you are overpaying your taxes, adjust your withholding or prepayments and invest the extra amount in an interest bearing account. Why? The IRS pays you zero interest on the extra taxes withheld from each paycheck.
- Last but not least, the most important advice is to consult your tax adviser before you make economic decisions that affect your income and taxes.
Former IRS Commissioner Mortimer Caplan said, “There is only one difference between a tax collector and a taxidermist—the taxidermist leaves the hide.”
Many people pay more tax than they have to; do not be one of them. Tax planning has become increasingly popular to a growing number of taxpayers. Gone are the days when planning was reserved for the super wealthy. Taxpayers of all income levels need strategies to lower their tax rates. It is never too late to start! For more information contact Henssler Financial at 770-429-9166 or [email protected].