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:
Investments and retirement 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. So far this year, the average refund is nearly
$2,800. 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. Use our
to figure out how much you can save.
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 that takes effect this year will make it easier to
claim this tax break. 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.
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. Until 2009,
there was a sweet tax break for folks who sold their homes, claimed
tax-free profit and then moved into a vacation property. After they
lived in that home for two years, they could sell and claim
tax-free profit again ... including appreciation from the days the
place was a vacation home. There can still be some real tax
benefits to this strategy, but the value has fallen. A portion of
any profit on the sale of a
vacation-home-turned-principal-residence will not qualify as
tax-free home-sale profit. The taxable portion will be based on the
ratio of the time after 2008 the property was used as a vacation
home to the total period of ownership.
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
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. A new IRS rule requires financial services
and brokerage firms to report to the IRS the cost basis for stocks
purchased on or after January 1, 2011 and mutual funds purchased on
or after January 2, 2012. They'll also provide you with this
information, which should make it easier for you to avoid costly
mistakes when you sell. For older shares, though, you'll still need
to track your basis to avoid overpaying taxes on your profits.
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.
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.
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
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.
Starting in 2013, 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
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