Older families should make these moves throughout the year to
keep their bill low at tax time. Here are the areas where you
should look for savings:
Give yourself a raise.
If you got a big tax refund this year, it meant that you're
having too much tax taken out of your paycheck every payday. Filing
a new W-4 form with your employer (talk to your payroll office)
will insure that you get more of your money when you earn it. If
you're just average, you deserve about $225 a month extra. Try our
easy withholding calculator
now to see if you deserve more allowances.
Go for a health tax break.
Be aggressive if your employer offers a medical reimbursement
account -- sometimes called a flex plan. These plans let you divert
part of your salary to an account which you can then tap to pay
medical bills. The advantage? You avoid both income and Social
Security tax on the money, and that can save you 20% to 35% or more
compared with spending after-tax money. The maximum you can
contribute to a health care flex plan is $2,500.
Don't be afraid of home-office rules.
If you use part of your home regularly and exclusively for your
business, you can qualify to deduct as home-office expenses some
costs that are otherwise considered personal expenses, including
part of your utility bills, insurance premiums and home maintenance
costs. Some home-business operators steer away from these breaks
for fear of an audit.
But a new IRS rule makes it easier to claim this
. Instead of calculating individual expenses, you can claim a
standard deduction of $5 for every square foot of office space, up
to 300 square feet.
Time receipt of self-employment income.
Those who run their own businesses have a lot of flexibility at
year-end. To push the receipt of income into the following year ,
delay mailing bills to clients until late in December that payment
is received after December 31. Or, pay business expenses before
January 1 to lock in deductions.
Pay back a 401(k) loan before leaving the job.
Failing to do so means the loan amount will be considered a
distribution that will be taxed in your top bracket and, if you're
younger than 55 in the year you leave your job, hit with a 10%
Convert a vacation home to your principal residence.
The break that allows homeowners to take up to $250,000 of
profit from a home sale tax-free ($500,000 for married couples) is
restricted to the sale of a primary residence. But you can extend
the tax break to cover part of the profit on a second home if you
convert it to your primary residence at least two years before you
sell. The portion of the profit that is tax-free is based on the
ratio of time after 2008 that the house was a second home to the
total time you owned it. Say you buy a vacation home this year, use
it as a retreat for five years, and then move in and make it your
principal residence. If you sell ten years later, two-thirds of the
profit would be tax-free.
Use an installment sale of real estate to defer a tax
If the buyer pays you in installments, the IRS will let you pay
the tax bill on your profit in installments, too. You must charge
interest on the deal, and each payment you receive will have three
parts: interest (taxable at your top rate), capital gain (taxed at
a maximum of 15%) and return of your investment (tax-free).
Tote up out-of-pocket costs of doing good.
Keep track of what you spend while doing charitable work, from
what you spend on stamps for a fundraiser, to the cost of
ingredients for casseroles you make for the homeless, to the number
of miles you drive your car for charity (worth 14 cents a mile).
Add such costs with your cash contributions when figuring your
charitable contribution deduction.
Protect your heirs.
Be sure beneficiary designations for your IRAs and 401(k)s are
up to date. If your IRA or 401(k) goes to your estate rather an a
designated beneficiary, unfavorable withdrawal rules could cost
your heirs dearly.
Death and taxes.
Someone who is terminally ill may want to sell investments that
show a paper loss. Otherwise, the "tax basis" of the property --
the value from which the heir will figure gain or loss when he or
she sells -- will be "stepped-down" to date-of-death value,
preventing anyone from claiming the loss. If you want to keep
property, such as a vacation home, in the family, consider selling
to a family member. You get no loss deduction, but it could save
the buyer taxes later on.
Roll over an inherited 401(K).
A recent change in the rules allows a beneficiary of a 401(k)
plan to roll over the account into an IRA and stretch payouts (and
the tax bill on them) over his or her lifetime. This can be a
tremendous advantage over the old rules that generally required
such accounts be cashed out, and all taxes paid, within five years.
To qualify for this break, you must name a person or persons (not
your estate) as your beneficiary. If your 401(k) goes through your
estate, the old five-year rule applies.
Investment and Retirement Planning
Check the calendar before you sell.
You must own an investment for more than one year for profit to
qualify as a long-term gain and enjoy preferential tax rates. The
"holding period" starts on the day after you buy a stock, mutual
fund or other asset and ends on the day you sell it.
Don't buy a tax bill.
Before you invest in a mutual fund near the end of the year,
check to see when the fund will distribute dividends. On that day,
the value of shares will fall by the amount paid. Buy just before
the payout and the dividend will effectively rebate part of your
purchase price, but you'll owe tax on the amount. Buy after the
payout, and you'll get a lower price, and no tax bill.
Keep a running tally of your basis.
For assets you buy, your "tax basis" is basically how much you
have invested. It's the amount from which gain or loss is figured
when you sell. If you use dividends to purchase additional shares,
each purchase adds to your basis. If a stock splits or you receive
a return-of-capital distribution, your basis changes. Only by
carefully tracking your basis can you protect yourself from
overpaying taxes on your profits when you sell. If you're not sure
what your basis is, ask your brokerage or mutual fund company for
help. (Financial services firms must now report to investors the
tax basis of shares redeemed during the year. For the sale of
shares purchased in 2012 and later years, they must also report the
basis to the IRS.)
Mine your portfolio for tax savings.
Investors have significant control over their tax liability. As
you near the end of the year, tote up gains and losses on sales to
date and review your portfolio for paper gains and losses. If you
have a net loss so far, you have an opportunity to take some profit
tax free. Alternatively, a net profit on previous sales can be
offset by realizing losses on sales before the end of the year.
Beware of Uncle Sam's interest in your divorce.
Watch the tax basis -- that is, the value from which gains or
losses will be determined when property is sold -- when working
toward an equitable property settlement. One $100,000 asset might
be worth a lot more -- or a lot less -- than another, after the IRS
gets its share. Remember: Alimony is deductible by the payer and
taxable income to the recipient; a property settlement is neither
deductible nor taxable.
Time claiming Social Security benefits.
Time claiming Social Security benefits. If you stop working, you
can claim benefits as early as age 62. But note that each year you
delay -- until age 70 -- promises higher benefits for the rest of
your life. And, delaying benefits means postponing the time you'll
owe tax on them. Try
Kiplinger's Social Security Solutions
to find out your optimal solution.
Dodge a 50% tax penalty.
Taxpayers over age 70½ are required to take minimum withdrawals
from their IRAs each year. Failing to do so subjects them to one of
the toughest penalties in the tax law: The IRS claims 50% of the
amount that should have come out of the account. Your IRA sponsor
can help pinpoint the amount of the required payout.
Keep careful records of medically necessary improvements.
To the extent that such costs -- for adding a wheelchair ramp,
for example, lowering counters or widening a doorway or installing
hand controls for a car -- exceed any added value to your home or
vehicle, that amount can be included in your deductible medical
Include travel expenses in medical deductions.
In addition to the cost of getting to and from the doctor, you
can deduct up to $50 a night for lodging if seeking medical care
requires you to be away from home overnight. The $50 is per person,
so if you travel with a sick child to get medical care, you can
deduct $100 a day. You get a tax benefit only to the extent your
expenses exceed 10% of adjusted gross income, or 7.5% if you're 65
Stay actively involved in rental real estate.
Generally, anti-tax-shelter legislation prevents losses from
real estate investments from being deducted against other kinds of
income. But, if you are actively involved in a rental activity, you
can deduct up to $25,000 of such losses, if your adjusted gross
income is less than $100,000. You don't have to mow grass and
unclog toilets to qualify as actively involved; but you should make
sure you're involved in setting rents and approving tenants and