Wednesday March 25, 2015
Often overlooked tax credits and deductions
posted by Thomas J. Banaszynski
TAX DEDUCTIONS AND TAX CREDITS
For many years, the Internal Revenue Service (“IRS”) has recognized that millions of taxpayers overpay their taxes every year by overlooking money saving opportunities. Some suggestions are discussed here. This list is not meant to be exhaustive; however, it might give you some insight on how to reduce your taxes, and keep more money in your pocket.
Out-of-Pocket Charitable Deductions: It’s hard to overlook big charitable gifts you might make during the year, by check or payroll deduction. But little things can add up too. You can write off the costs of out-of-pocket expenses incurred while you do work for a charity, e.g. supplies, food for a soup kitchen or a fundraiser, providing stamps for a fundraiser. Do not forget to remember to deduct money you put into buckets or firemen’s boots at the stop sign or traffic light.
Moving Expenses to Take Your First Job: While job-hunting expenses are not deductible when looking for your first job, moving expenses to get to that job are deductible. You do not even have to itemize. But, your first job must be at least 50 miles from your old home.
Military Reservists’ Travel Expenses: Members of the National Guard or Reserve may write off the cost of travel to drills or meetings. To qualify, one must travel more than 100 miles from home, and be away from home overnight.
Deduction of Medicare Premiums for the Self-Employed: People who continue to run their own businesses after qualifying for Medicare can deduct the premiums they pay for Medicare Part B and Medicare Part D, plus the cost of supplemental Medicare (medigap) policies or the cost of a Medicare Advantage plan. This deduction is available whether or not an individual itemizes their tax deductions, and is not subject to the 7.5% of adjusted gross income test that applies to ordinary medical expenses.
Credit for Energy-Saving Home Improvements: There is no longer a tax credit available to homeowners to save energy by installing such things as storm windows or insulation. However, the law will still allow credit, up to 30% of the total cost, for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines.
Do Not Unnecessarily Report a State Income Tax Refund: Most people who get state tax refunds can simply ignore them. This is so even though the state will send the IRS a copy of the 1099-G form reporting the refund. If one did not itemize deductions on the previous year’s federal tax return, the state tax refund is tax-free. Even if one did itemize, part of the state tax refund might be tax-free. It is taxable only to the extent that the deduction of state income taxes previously actually saved the taxpayer money.
MyRA: MyRA is a retirement savings plan designed as a Roth IRA with training wheels. After-tax monies are paid into the account, the money accumulates on a tax-free basis and qualified distributions are tax-free. As with any Roth account, investors can withdraw their contributions from the MyRA at any time, and for any reason. The MyRA is designed for workers who do not have access to another retirement savings plan, and permits investors to contribute very small sums on an ongoing basis.
Saver’s Credit: This credit is designed to encourage individuals and families with lower incomes to put money into IRAs or MyRAs, or qualified company retirement plans. The lower the income, the higher the credit. The credit is up to a maximum of $1,000 for single filers, and $2,000 for married couples filing jointly.
Health Savings Accounts: People who have a high-deductible health-care plan can contribute to a health savings account, using pre-tax money. A high-deductible plan is one with at least a $1,300 deductible for individuals, and a $2,600 deductible for families. The maximum out-of-pocket expenses for covered plans are $6,450 for individuals, $12,900 for families.
Flexible Spending Accounts: This is another device for individuals who have medical expenses to use pre-tax monies to pay for a co-pay or deductible. The limit an individual can contribute to a flexible spending account is $2,550 for calendar year 2015.
IRA Contributions and 401(k): IRA contributions and 401(k) contributions are always made with pre-tax dollars. Any time an individual works for an employer who matches his or her contribution, that employee should try and contribute the maximum amount that the employer will match, or at least as much as possible. For example, if an employer will match a contribution up to three percent (3%), try and contribute at least three percent (3%) to the IRA or 401(k).
I hope the foregoing will give you some insight as to ways to reduce your taxes. Always remember to consult with your tax advisor or tax preparer as to the use of these tax-saving methods, along with others. Credit to Kiplinger and Morning Star.