Individual tax planning
Tax Planning Ideas for Individual Taxpayers
Individuals have fewer options than businesses when trying to reduce their tax exposure but, even individuals have several opportunities to save some money when tax time arrives. Planning to reduce taxes requires several steps:
- You MUST have a handle on your overall financial situation. There is no way to plan if you don't know what's going on with your money.
- You need to have a general idea of what tax rules apply to your situation so that you are aware of the consequences of the financial decisions you make.
- You need to make the proper decision when given the opportunity.
- You need to have someone to bounce ideas off of BEFORE you commit so that you find out ahead of time if there is a better way to structure a transaction.
There are several tax planning ideas for individuals listed below. Review them to see if any might apply to you, then contact me to discuss the details of your situation.
Review your income and deductions in the last quarter of the year. Certain deductions phase out at varying levels of income. Other deductions help with the regular income tax but do nothing to reduce the Alternative Minimum Tax. Some deductions will do you more good if you "double up". The decisions involved are complex and interrelated and, therefore, should be made after careful consideration of all of the tax and financial effects.
If you are going to borrow money, consider the tax effects of various borrowing sources and methods. For example, if you use a home equity line of credit (HELOC), the interest is probably fully deductible regardless of what you do with the money. If you borrow money to buy a car, that interest is NOT deductible. So, from a tax standpoint, it makes better sense to borrow from the HELOC and use that money to buy the car. Of course, there are non-tax issues to consider as well, so do not act on this without consulting with us first.
Maximize your use of the Hope credit, lifetime learning credits, and tuition deduction. Each of these can help you recover the cost of some college expense but each also has rules that affect when and how often they can be used as well as limitations on how much income you can have to qualify.
If you are planning on selling your residence, make sure you comply with the current rules so that you get the full benefit of the income exemption that is available. The "rollover" tax rules are no longer in effect.
If you have loaned money to someone and it appears that you are not going to be paid back, document any efforts that you have made to collect it so that you will qualify to take a deduction for non-business bad debts.
Give appreciated property to charity instead of selling the property and giving cash. This allows the charity to sell the property and receive the cash but allows you to deduct the full value and not pay capital gains tax on the appreciation. As always, there are plenty of rules to follow, so make sure to check with us before finalizing the transaction.
Use an option to postpone the recognition of a sale of property. The sale of an option is not recognized as income until the option is either exercised or it expires. So you can sell an option on a piece of property in December (and get the bulk of the money), then close in January and not be required to recognize the gain until next year.
The current time frame for long-term capital gain treatment is "more than one year". Make sure you are aware of that time frame when deciding when to sell appreciated assets. Sometimes, just waiting a day or two makes the difference between 35% tax and 15% tax.
Consider using a like-kind exchange (Section 1031 exchange) if you are selling a property other than your personal residence. Personal residences are specifically excluded from Section 1031 treatment. There is a full discussion of Section 1031 here.
If you are in a higher tax bracket (above 25%), you should consider tax-exempt investments such as municipal bonds as a way to increase your net, after-tax, return. As with any investment, there are issues other than taxes that you must consider - it will not do you any good to save $500 in federal income tax if you lose $10,000 in principal. Be sure to consult with a qualifed investment advisor before making any significant changes to your portfolio.
Contribute the maximum possible to any retirement accounts that are available to you. Retirement accounts are, in my opinion, the best tax shelter available to most people.
If you are going to receive a distribution from a retirement account (due to changing jobs, downsizing, job elimination, or similar factors), you should probably roll over the entire amount (using a direct trustee to trustee rollover). Then you can control when and how much you are taxed by taking only what you absolutely need when you need it. If you take the whole amount, taxes will apply up front and, if you are under age 59 1/2, an additional 10% penalty will apply unless you meet certain exceptions.
The bottom line is - you should ALWAYS be aware of the tax implications of ANY financial transaction that you are considering. You cannot let taxes "rule" the decision, but they must be considered.
Keep in mind that the ideas presented are, by necessity, of a general nature. We would be happy to discuss how these, or other ideas, apply to your specific situation. Click here to send us an email.
To Your Financial Health
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