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Tax Season Can Be Rewarding if You Keep Good Records

As we near the end of the year and tax season will soon be upon us, I would like to stress the importance of proper tax documentation. Many taxpayers forgo worthwhile tax deductions because they have neglected to keep receipts or records. It might be too late for you, too, for the 2016 tax year, but if you have been bad at keeping good tax records, plan to start fresh in 2017. Keeping adequate records is required by the IRS in order to take most deductions.  Don’t keep good records just because the IRS says so. Do it for yourself, for personal organization, for peace of mind.  Neglecting to track these deductions can lead to overlooking them and to guessing when at tax preparation time, which is risky.

You also need to maintain records regarding your income. If your receive a large tax-free amount, such as a gift or inheritance, make certain to document the item so that the IRS does not later claim that you had unreported income.  Good records will save you time and money.  For detailed help, go to www.moneymastery.com.

The following ideas for documenting deductions are for general information only and should be tailored to your specific situation. If you think one of them fits your tax situation, check with your tax adviser.

Give appreciated assets to charity. If you’re planning to make a shutterstock_44998930 (800x600)charitable gift, it generally makes more sense to give appreciated long-term capital assets to a charity, instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash prevents your having to pay capital gains tax on the sale, which can result in considerable savings, depending on your tax bracket and the amount of tax that would be due on the sale. Additionally, you can obtain a tax deduction for the fair market value of the property.

Keep track of mileage driven for business, medical or charitable purposes. If you drive your car for business, medical or Carcharitable purposes, you may be entitled to a deduction for miles driven. For 2016, it’s 54 cents per mile for business, 19 cents for medical and moving purposes, and 14 cents for service for charitable organizations. You need to keep detailed daily records of the mileage driven for these purposes to substantiate the deduction.  I recommend a service I use that really does it all for me.  Go to www.taxbot.com to learn more.

Take advantage of your employer’s benefit plans to get an effective deduction for items such as medical expenses. Medical and dental expenses are generally only deductible to the extent they exceed 10 percent of your adjusted gross income. For most individuals, particularly those with high income, this eliminates the possibility for a Medicarededuction. You can effectively get a deduction for these items if your employer offers a Flexible Spending Account, sometimes called a cafeteria plan. These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars. Another such arrangement is a Health Savings Account. Ask your employer if they provide either of these plans.

Check out separate filing status.  Certain married couples may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria:

  • One spouse has large medical expenses, miscellaneous itemized deductions, or casualty losses.
  • The spouses’ incomes are about equal.

Separate filing may benefit such couples because the adjusted gross income “floors” for taking the listed deductions will be computed separately. On the other hand, some tax benefits are denied to couples filing separately. In some states, filing separately can also save a significant amount of state income taxes.

If self-employed, take advantage of special deductions. You may be able to expense up to $500,000 in 2016 for qualified equipment purchases for use in your business immediately instead of writing it off over many years. Additionally, self-employed individuals can deduct 100 percent of their health insurance premiums as business expenses. You may also be able to establish a Keogh, SEP or SIMPLE IRA plan, or a Health Savings Account, as mentioned above.

ChildrenLemonadeStandIf self-employed, hire your children in the business.  If your child is under age 18, he or she is not subject to employment taxes (FICA) from your unincorporated business (income taxes still apply, but they can earn close to $5,000 and not pay any tax). This will reduce your income for both income and employment tax purposes and shift assets to the child at the same time; however, you cannot hire your child if he or she in under the age of 8 years old.

Take out a home equity loan (HELOC).  Most consumer-related interest expense, such as from car loans or credit cards, is not deductible. Interest on a home equity loan, however, can be deductible. It may be advisable to take out a home-equity loan to pay off other nondeductible obligations.

Bunch your itemized deductions. Certain itemized deductions, such as medical or employment related expenses, are only deductible if they exceed a certain amount. It may be advantageous to delay payments in one year and prepay them in the next year to bunch the expenses in one year. This way you stand a better chance of getting a deduction.

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