Fall is upon us. When I saw leaves dropping I used to grumble about toiling to rake and bundle them. No more! Now I ask myself, how can I make this years taxes drop like falling leaves? While enjoying the cooler weather, why not put a chill on the household income taxes burden too? I plan to take full advantage of the following, you can too.
RETIREMENT ACCOUNTS: Review them. Are you saving 100% of the amount allowed tax deferred? Is your spouse? Participants of a 401k or 403b plan can defer up to $15,500 in taxable income. Saving for college too? If you are funding your child’s education in a taxable account, why not avoid future taxes by shifting these funds into your IRAs, qualified plans, and Section 529 or Coverdell accounts? Done right, all of these accounts allow tax-free distributions for qualified education expenses.
Did you know that if you attained age 50 any time during 2007, you can defer an extra $1,000 to your Roth 401k and 403b program? Unlike individual IRAs, these qualified plan contributions are not subject to income caps. See your HR department to learn more about these plans.
EDUCATION EXPENSES: HOPE AND LIFETIME LEARNING CREDITS: Each could cut tax bills for each college student by over $1100 per year! Tip, when using tax credits, always use the Lifetime Learning Credit (LLC) for the first semester of college and then the Hope credit for semesters 2 and 3. Why? Unlike the LLC, you’re not likely to maximize the Hope credit based on education expenses for the last 4 months of the tax year. Once you have 12 months expenses, you may maximize the credit.
Student loan interest deduction: You can deduct amounts paid on your or a family members behalf. Income limits begin at 55/110K, single, MFJ.
RMD (Required Minimum Distributions). If you attained the age of 70 ½ this year, you must begin your RMD from qualified plans and traditional IRAs by April 1 2008. Failure to do so may trigger a 50% penalty on the amount that should have been distributed to you. Now the good news: Tables are easier to use and it only takes a few hours to calculate and actualize with your custodian. Many custodians assist their clients in calculating the RMD. Common calculation mistakes to avoid include:
Failure to base your calculation on the aggregate total of all your plans.
Counting an inherited IRA or Roth IRA as part of the RMD
Having an investment portfolio that is unfriendly to your distribution needs, for example, one not designed for income.
REAL ESTATE AND MEDICAL Bunch real estate taxes into one year for multiple homes for your primary residence and your vacation home with taxes due Dec 30th. You could pay two bills in January and two more the following Dec. Do the same with dental and medical bills. It’s smart to use them in years in which you need the greatest tax breaks. Why? To rise above the floor of itemized deduction limits.
INVESTING: For folks in high tax brackets: Be careful of purchasing mutual funds such as growth funds outside of retirement plans that have high capital gains and dividend distributions in the last quarter of the year. You may find yourself paying taxes at ordinary rates as high as 35% for income reinvested in your account - and never seen by you.
Don’t wash a loss: You may take a long-term or short-term capital loss for securities that performed poorly this year. Buy them or a like investment back after 31 days has transpired to avoid the "Wash rules". Then take tax losses. This is a highly effective strategy for lowering adjusted gross income.
Wash your gains: Under the wash rules, like investments mean that if you sold an index fund XY on the S&P 500 and then purchased AB S&P index fund for the same dollar value in less than 31 days, wash rules apply. For example, if XY index fund had tripled in value since you bought it and you decided to sell it because annual fees were too high. You’d have to pay capital gains tax on the appreciated amount. However, if you subsequently purchased AB index fund for the same dollar amount, it’s a wash sale, and there are no taxes due.
Best idea of all for saving taxes this fall is to call us at 781-862-6642 for a free tax planning review. How much could you save? Can you think of a more valuable way to spend an hour this fall? I can’t.
For tax filing help, call the IRS at 800-829-1040 or go to the links section of www.IRS.gov. Order publication 17, your personal tax guide. You’ll find lots of great tips here and on the Web.
