WAYS TO SAVE TAXES THROUGH LIFE'S TRANSITIONS
By Ginita Wall, CPA, CFP
Taxes are, unfortunately, a part of every financial decision.
Like it or not, Uncle Samís greedy fingers reach into your pocket
with every paycheck and each dollar of investment earnings.
The booklet includes tax tips for eight major life events, including
going to school, beginning a job, becoming a family, business
ownership, divorce, and retirement, plus bonus sections on tax
troubles and year-end planning.
- Withdraw penalty-free from your traditional IRA to pay higher
education expenses for yourself, your children, or grandchildren.
Youíll have to pay tax on the withdrawals at your regular income
tax rate, but no early withdrawal penalty will apply.
- File a tax return every year you are due a refund. If your
earnings are so low that you are not required to file, youíll
need to file a return in order to claim a refund of withheld
income taxes. If you wait more than two years to file, the IRS
is not required to issue you a check.
- Keep track of the cost of books and equipment you purchased
while in school. When you begin working, you may be able to
depreciate those items that you use for your career.
The Working World
- Start investing in 401(k)s, stock purchase plans, employee
stock options, and other tax-advantaged accounts as soon as
possible. Small contributions made at an early age are much
more valuable than large contributions made a few years before
- Learn about your companyís fringe benefits. Large employers
often have tuition assistance plans, free employee counseling,
mass transit commuting assistance, and other tax-free perks
that might not be common knowledge around the water cooler.
Visit human resources for a chat about what your company offers,
or check out your companyís website.
- Consider paying your own disability premiums. If you become
disabled, your disability benefits will be tax-free. If your
employer pays your premiums as a tax-free perk, disability benefits
will be taxable when received.
- Only borrow from your 401(k) in an emergency. You have the
option, if you really need the money, to borrow these funds
without taxes or penalties. However, the interest you pay on
the loan wonít be tax deductible, and you will miss out on the
capital appreciation of the money if youíd left it invested
it for growth in the plan.
- Set aside money in your employerís dependent care plan. Although
tax-free reimbursements by your employer reduce the child and
dependent care credit you are allowed to take, they are still
a good deal for taxpayers in the 20 percent tax bracket and
- Claim the child tax credit. If your income is under $75,000
($110,000 for joint filers) you are eligible to receive up to
$500 for any child, stepchild, grandchild, adopted child, or
foster child in your care.
- Claim the adoption tax credit when you adopt a child, if your
income is under $115,000. You can claim a tax credit of up to
$5,000 ($6,000 for a special-needs child) for adoption fees,
attorney services, court costs, and other expenses in the year
the adoption is final.
- If necessary, withdraw from your traditional IRA to meet medical
emergencies, for education, or to buy a home. You can withdraw
money from your IRA penalty-free (but not tax-free) before age
59-1/2 to pay for medical expenses that exceed 7-1/2 percent
of your income, to pay for health insurance premiums if you
are unemployed, to pay for higher education expenses, or to
pay up to $10,000 of first-time home-buying expenses. If you
desperately need money for one of these qualified expenses,
your IRA is a place to start.
- Before your divorce, find and copy all business tax returns
for your spouseís corporation or partnership. The IRS will not
give you copies of your spouseís business returns if you did
not sign them.
- When in doubt about how to file, consider a separate return.
This ensures that you will not be held liable for the actions
of your spouse, if she omits income or overstates expenses.
But even if you file a joint return, the innocent spouse provisions
of the tax law will protect you if you werenít aware of the
misstatements on the joint return.
- Consider the tax implications of support. Child support is
not deductible, but alimony is. Calling child support "family
support" makes it fully taxable to the recipient and deductible
to the payer, just like alimony. Do not characterize the payments
as "family support" unless you will end up with more
money after taxes are paid.
- Follow the 5Ds for alimony deductibility. If you want
a deduction for the alimony you pay (it will be taxed to your
ex), it must be paid in dollars, under a decree
or written agreement, and cease on your exís death. After
the divorce, you must maintain your distance (you canít
live with your ex), and the payments canít be designated
as non-taxable or child support.
- Keep a calendar of the days (and nights) your child spends
at your house and at your ex-spouseís. This will provide documentation
for the courts and for the IRS (for dependency exemptions and
head of household filing status), and also help you avoid disagreements
with your ex-spouse about what really happened on a particular
- Deduct 100 percent of the health insurance premiums for your
entire family instead of just 60 percent. If you employ your
spouse in your business, you may cover him and deduct the entire
premium as an employee benefit. As a self-employed taxpayer,
you can deduct only 60 percent of the health insurance premiums
you pay on your own behalf.
- Deduct an office in your home. If you regularly and exclusively
use part of your home to perform administrative or managerial
activities for your business, you can claim a home office deduction
for utilities, rent or mortgage interest, depreciation, phone
use, cleaning, and the like. You can still take this deduction
even if you provide products or services at other locations.
- Read more. Subscriptions, books, and other materials related
to your field are tax-deductible items. Ditto conferences, seminars,
and courses related to your work.
- Use consulting agreements when you buy or sell a business.
For example, if the buyer hires the seller on an exclusive contract,
the seller will be able to set up a Keogh plan, as well as deduct
ordinary and necessary business expenses. The buyer will get
a current tax deduction for salary paid to the seller.
Home Ownership and Investing
- Deduct personal bad debts. If your best friend borrows $10,000
and then skips town, you can deduct this non-business bad debt
as a short-term capital loss on your tax return.
- Donít fall for tax evasion schemes such as revocable foreign
trusts or secret offshore bank accounts. There are plenty of
legitimate ways to reduce your income taxes, so donít fall for
shady deals sold in the backs of magazines or over the Internet.
- Own your own home. Home ownership is one of the last tax shelters
available to the middle class. Mortgage interest and property
tax deductions will save you taxes, and saving to own a home
is a wonderful use for your money after you have contributed
the maximum to tax-advantaged retirement plans.
- Deduct points paid on your home loan. Points paid when you
acquire your home are deductible in that year. Points paid to
refinance a loan must be written off over the length of the
loan (1/30 each year on a 30 year loan). If you refinance again,
donít forget to write off the remaining unamortized points in
the year you refinance.
- Contribute to your IRA early in the year. Although you have
until April 15 of the following year to contribute, your money
will have 15-1/2 more months to grow if you contribute on January
1 of the previous year. Over a lifetime, this additional compounding
will greatly increase your retirement nest egg.
150 Ways to Save Taxes Through Lifeís Transitions,
By Ginita Wall
This booklet is for sale in the WIFE.org bookstore: order
Ways to Save Taxes Through
Life’s Transitions was
written by Ginita
Wall, CPA, CFP