Monday, October 26, 2015
I Want to Lower my Taxes!
This is one of the new chapters from the upcoming 2015 edition of Everyday Taxes (link goes to the 2018/2019 edition which is the one you should buy), the book everybody should own, but nobody does. Thought I'd post it here since it should be useful to a lot of people. So, here it is:
Don't we all! There are a lot of guru's out there claiming they can lower your taxes. They range from frauds, kooks, and one trick ponies all the way to legitimate tax experts. Avoid the scam artists like the plague. You can always tell who they are because they over promise and make it sound easy. The fact of the matter is that it's hard to lower your taxes without causing problems with your life. As I said in my advice chapter, you should rarely be doing anything just to lower your taxes. Sure, buying a house can lower your taxes, but you should buy a house when it makes sense for your life - not just to lower your taxes. So I won't be talking about things that might lower your taxes, but that should be done based on other factors.
I'm going to cover two types of things here. Things that directly lower your taxes and things that defer your taxes. Deferring taxes is usually good, unless you'll pay taxes at a higher rate later. Even then, deferring taxes is often the right plan, especially over a long timeline.
I'm going to try to put things in the order of best to worst, based on my opinion, and the extent to which they are likely to apply to more people. Some of them I will advise based on things other than just taxes, though I might not specify why - it's kind of like my personal preference. There are probably more ways than these, but these are the ones that apply most often, or that don't require 7 CPA'S to make happen.
Last thing before the meat - some of these require you to itemize. If you don't normally itemize, some of these things won't help you unless big numbers are involved. I'll identify these with a "Requires Itemizing" closing sentence.
1. The first thing you should do if you want to save on taxes is talk to a tax professional and have them review your last three years tax returns. Many will do this for free and only charge you if they find some more money for you. A good tax pro will not only use the review to find you money in the previous years, but also use what they learn about your tax situation to give you advice for the future.
2. Funding tax deferred accounts such as 401k's and Individual Retirement Accounts is almost always a good idea. Talk to BOTH a tax pro and a financial advisor to figure out what types of accounts are best for your situation. If your employer matches contributions to your 401k, investing up to the match is a no brainer. For accounts with your employer, you might not see the reduced taxes reflected in your paycheck, since the withholding will drop with the reduced taxable income. Health Savings Accounts are another good option for deferring taxes on current income.
3. Giving stuff to charity is a great way to save on taxes. One of the things I like to tell people is that anything you pay that reduces your taxable income (mortgage interest, job expenses, etc.) is money out of your pocket. The return on your deduction is whatever your state and federal tax rate is; so it's a net loser. Cash contributions to charity work exactly like that. Non cash donations however, are like the proverbial free lunch. You give away crap you don't want to someplace that will do good with it, and you pay less in taxes. I have a whole chapter in my book on this: I'm Donating to Charity. Requires Itemizing.
4. Selling investments (in non tax deferred accounts) for a loss during the year. You can do this both to offset taxable capital gains, or you can deduct up to $3,000 of net capital losses right off of your other income ($1,500 if MFS). Do this only if it makes good investing sense. Also, don't try to sell for a loss and buy it right back - that's called a wash sale. You have to wait more than 30 days after selling in order to deduct the loss.
5. There's a weird trick on Capital Gains, but you might need your tax pro's help with it. If you have long term capital gains (generally on investments held at least a year) and your taxable income including the gains is below $38,600 ($77,200 if filing jointly) you pay ZERO taxes on the gains. You won't see a direct reduction on your current taxes, but you will NEVER pay taxes on those gains, even if you buy the investment back the next day (wash sale rules only apply to losses.) This is the most under-utilized tax strategy out there. I don't recommend doing this without the help of a tax pro, because there's a lot more to it than I can discuss here. The above numbers will increase every year with inflation but may not get updated in this blog. Those numbers are for 2018.
6. Some deductions come with a threshold you have to be above before you can deduct them. Job expenses (eliminated with the 2018 tax law change) and medical expenses are two of them. If you don't normally get above the threshold, but have an unexpected expense in one year that puts you above it, this strategy can help. Once you know you will be above the threshold, move any planned expenses for early in the next year into the current year. For medical this might mean moving physicals or procedures up, or buying new glasses or contacts. his also applies to itemizing itself. If you are below the standard deduction, but close, donate to charity every few years, instead of every year. This will allow you to get some use out of the donations. Requires Itemizing.
7. Keep better records. You can't deduct something you forgot about. I like notebooks that are handy. In the car, on the desk, in your purse, in your shirt pocket. Write things down right away!
8. Don't miss mileage deductions. Keep a mileage log in the car, and write down the mileage after every trip. Mileage mostly applies to home businesses, people who deduct job expenses, medical trips and charity trips. Requires Itemizing (except businesses). Use the Mile IQ App for this. It costs a small amount of money (which you can deduct) but makes it EASY!
9. I almost didn't want to write this one down, because I wouldn't personally do it, but the math for taxes works out. You can make purchases that wouldn't ordinarily be deductible, with home equity debt, that might make the interest deductible. For example, you might buy a car with a home equity loan, making the interest deductible. Two BIG things to consider first: First, there are limitations on home equity debt not used to buy or improve your home - so talk to a tax pro first. Second, if you can't answer yes to this question: "Are you willing to lose your home if you can't make the payments on that other thing you bought?" then don't borrow money on your home to make the purchase. This strategy puts your HOME on the line if you don't make the payments.