1. Document Your Expenses Well!
This may be the single most important tax tip. You can plan and do everything correctly, but in the event of an audit, many of your legitimate expenses and deductions may be disallowed if they are not documented well. Ask yourself if you believe your documents will survive a tax audit. Have you kept a mileage log so that you can prove the percentage business use you claim for your vehicle? Have you kept receipts for all your entertainment expenses and listed the business purpose on the back of each receipt?
2. Participate In A Retirement Planning Vehicle.
There are numerous retirement planning vehicles (IRA, SEP IRA, Simple IRA, Defined Benefit, Defined Contribution, 401(k), 403(b), Nonqualified Plans). In general, if your employer provides a matching contribution, we recommend participating in that plan at least up to the maximum amount the employer will match on. For more information on which retirement plan vehicle is right for you, see our article on retirement advice.
3. Take Advantage of The Education Tax Incentives.
– Hope Credit – tax credit for qualifying education expenses (first two years of undergraduate)
– Lifetime Learning Credit – tax credit for qualifying education expenses (all undergraduate and graduate levels, available for an unlimited number of years. In general, Can’t be taken in same year that Hope Credit is taken).
– Education Savings Accounts (ESA) – a trust established to pay qualified education expenses of a designated beneficiary. Contributions to an ESA are nondeductible. Earnings in the account are tax deferred, and subsequent distributions are tax free if used for qualified education expenses. Can be used for college and K-12th grade).
– Qualified Tuition Program (QTP), commonly known as State Sponsored 529 plan – allows you to save in a state sponsored plan for designated beneficiary’s college expenses. Most states have these plans set up to where money will be invested according to child’s age such that it’s re-balanced accordingly as child approaches age 18. No AGI limits and has VERY high contribution limits.
– Withdrawal From Traditional & Roth IRAs – no 10% early withdrawal penalty if funds withdrawn to pay for qualifying education expenses (all undergraduate and graduate level qualifying expenses).
– U.S. Government Savings Bond Exclusion – The Education Savings Bond Program provides that all or part of the interest earned on EE and I bonds issued after December 31, 1989, is excluded from income for certain taxpayers if the bonds are used for college tuition and fees. Applies for all undergraduate and graduate level qualifying expenses.
4. Tax Advantage of Personal Tax Credits That Are Available.
– Adoption Expense Credit – expenses incurred in the legal adoption of a child under age 18 or for the adoption of an incapacitated or special needs person (regardless of age). IRS Pub. 972, Tax Form 8812.
– Alternative Motor vehicle Credit – a tax credit available for people who purchase four categories of new vehicles, the most common being hybrid vehicles. IRS Pub. 17 & 553, Tax Form 8910.
– Child & Dependant Care Credit – Day care expenses for dependent(s) under age 13 or incapacitated that allow taxpayer to work or look for work. IRS Pub. 503, Tax Form 2441.
– Child Tax Credit – Available to taxpayers with qualifying children under age 17. A tax planning strategy her, and under many of the credits or deductions subject to AGI limitations such as this one, is that certain taxpayers may qualify for a larger additional child tax credit (or other credits or deductions) if a portion of wage income is contributed to a 401(k) or cafeteria plan. IRS Pub. 972, Tax Form 1040.
– Credit for the Elderly or the Disabled – low income taxpayers age 65 or older or permanently and totally disabled. IRS Pub. 524, Tax Form Sch. R of 1040.
– Earned Income Credit – Working families with children under certain AGI limits qualify. IRS Pub. 596, Tax Form Sch. EIC of 1040.
– Education Credits – Qualified college or vocational school expenses for eligible students (see 5 above). IRS Pub. 970, Tax Form 8863.
– Federal Tax Paid On Fuels – Fuels used on a farm for farming purposes, off-highway business use and other qualified uses. IRS Pub. 510, Tax Form 4136.
– Foreign Tax Credit – Income taxes paid to a foreign country or U.S. Possession on income that is also subject to U.S. federal income tax. IRS Pub. 514, Tax Form 1116.
– Health Coverage Tax Credit – Individuals who receive pension benefits from the PBGC. Pub. 502, Tax Form 8885.
– Minimum Tax Credit – Credit allowed against regular tax for part of the alternative minimum tax (AMT) paid. Pub. 17, Tax Form 8801 & 6251.
– Mortgage Interest Credit – Part of interest expense paid by homebuyers issued a government mortgage credit certificate. Pub. 530, Tax Form 8396.
– Nonbusiness Energy Property Credit – Qualified energy efficiency improvements and residential energy property expenditures. VERY OFTEN OVERLOOKED. See www.energystar.gov and www.gamanet.org for a list of qualifying products and more information. Pub. 17 & 553, Tax Form 5695.
– Residential Energy Efficient Property Credit – Qualified photovoltaic property, qualified solar water heating property & qualified fuel cell property. See www.energystar.gov and www.gamanet.org for a list of qualifying products and more information. Pub. 17 & 553, Tax Form 5695.
– Retirement Savings Contribution Credit – Credit for low-income and middle-income individuals who make retirement plan contributions. Credit is in addition t tax deduction. Pub. 590, Tax Form 8880.
5. Rent Your Primary Residence For 14 Days or Less Tax Free.
Have 14 business meetings and charge your employer and/or your self owned company in lieu of salary. Creates tax free income to you, and saves the employer on FICA.
6. Take Advantages of Family Income Shifting Strategies.
Pay your child. This will be taxed as earned income at your child’s lower tax bracket, no matter what the age of the child. ‘Earned Income” not subject to “kiddie taxed” which is taxed at parent’s tax rate, rather than child’s tax rate. Buying your college aged child a condo, and paying them to rent and manage is a great way to get your college child income and allow you to deduct it, whereas, otherwise, it would be nondeductible.
7. Donate Appreciated Property Rather Than Selling & Donating The Proceeds.
If you have capital gain property that has increased in value (i.e. appreciated stock that you have held for 1 year or more), and you are considering making a charitable contribution, donate the appreciated property and deduct the FMV. You will get a charitable contribution deduction for the full amount of the FMV of the property donated, and not have to pay the capital gains tax on the appreciation in the property (a double tax bonus). To the contrary, if you gave property that has decreased in value, sell the asset and donate the proceeds. This generates a deductible loss from the sale and a deduction for a charitable contribution.
8. Deduct Expenses for Investment Travel.
This deduction is often overlooked. The cost of travel for the management or conservation of investments is generally deductible. This includes trips to broker or financial adviser, and also trips to look after investment property. If a car is used for investment travel, take the standard mileage rate, plus tolls and fees. Man people have investment properties in some very nice places to visit (beach, ski properties) and this could enable you to write off a good portion of these trips.
9. Self Employed Individuals Filing a Schedule C Should Incorporate or Form an LLC.
All net income on schedule C is subject to both ordinary income taxes, and the self employment tax (known as FICA) which is approximately an additional 15%. Part of this FICA tax can be avoided by putting your business into an S-Corporation or and LLC. By doing this, you can treat part of the next income from your business as a return on investment each year, not subjecting it to self employment tax. The amount is determined on a case by case basis, and you must subject enough income from your business to self employment tax as is deemed reasonable for the job and position you are doing. Also, forming an entity gives you liability protection as well. (Rental properties should be put inside of an entity also).
10. Consider Filing Married Filing Separate If The Right Facts Exist.
File married filing separately if one spouse has large medical expenses, casualty losses or employee business expenses subject to a percentage limitation based on AGI.
A couple in this situation may pay less tax by filing separately because these expenses are limited by the AGI of only one spouse.