10 Pro Moves to Save Taxes
The following are ten moves you make can save taxes. Remember, not every move below will save you a ton of money, some more than others. But several small savings add up. For instance, the first move mentioned below has a modest impact but involves a simple box-check!
#1 Medicare premiums as self-employed health insurance
If you are self-employed and on Medicare (you’ve turned 65), you can deduct your Part B Medicare premiums as self-employed health insurance and save taxes. If you in the 22% marginal tax bracket (MFJ $80,251 to $171,050 in taxable income) and are paying, say, the standard premium (Part B) of $144.60, you’ll save $380 in Federal tax. But this is just the minimum savings. Many pay for a supplemental policy, which is also deductible as self-employed health insurance. Remember that you might be on Medicare, but you still have a business and are entitled to this deduction; don’t miss it. See more details on Medicare costs at https://www.medicare.gov/your-medicare-costs/medicare-costs-at-a-glance.
#2 Directing IRA distributions to a charity
The standard deduction for MFJ and those 65 or older is $27,400 (for 2020). Many don’t have enough itemized deductions totaling more than that. Therefore, your charitable contributions do not help you with your taxes. Once you hit 72 years of age, you are required to withdraw from your retirement accounts what is called an RMD (Required Minimum Distribution). That RMD is taxable. Some don’t want to make the withdrawal but have to. Therefore, you have to pay tax on the money you don’t need and don’t get to deduct your charitable contributions. That doesn’t sound too beneficial. Well, IRS, in one of its rare “charitable” moments, fixed this. You are allowed to make a direct transfer of money from your retirement account to the charity of your choice. That move is not considered taxable income to you. This is one of the ways to save taxes that most people don’t know about.
#3 Claiming a dependent care credit for your parents
As you know, we no longer deduct ourselves and our kids as “personal exemptions.” Congress made up for this by increasing the child and dependent care credit. A credit is better than a deduction because it is a dollar for dollar reduction in your taxes. A deduction is a reduction in your taxable income to which the tax rate then applies; it’s worth much less. Caring for a dependent includes people other than your kids. If you provide more than 50% support for your parents, and they don’t earn more than $4,050 each, you may be able to claim each one of them and get a $500 per person credit off your tax; and . . . they don’t have to live with you. You’d be surprised at how much your support adds up, so don’t forget to see if it works for you.
#4 Deducting home renovations as medical expenses
Some people have medical conditions requiring unique living environments. Suppose you need special ramps, furniture, shade coverings, etc. necessary to safeguard your health. In that case, you may be able to save taxes by deducting these expenses as medical expenses. You need more than 7.5% of your income to deduct them, however. Such a tax move is somewhat rare but works none-the-less.
#5 Deducting assisted living fees as medical expenses
Anyone residing in an assisted living facility may qualify to deduct 100% of the facility fee. Their health must have deteriorated to a certain point. We all know the exorbitant expense of these facilities. A 100% typically reduces the tax to zero.
#6 Deducting student loan interest even if Mom & Dad make the payments
The student can deduct student loan interest even if someone else pays the loan. Don’t let this deduction slip away. You must, however, meet the income limitations for the deduction.
#7 Deducting mortgage interest & real estate taxes even if you don’t own the house
Many parents buy a second house for the use of a child. Some kids go away to college, and instead of paying for an apartment or dormitory, the parents purchase a home. If the student makes the mortgage payment, the real estate taxes, and takes care of the property, they are entitled to the tax deductions; not the parent. Because the student enjoys both the blessings and burdens of the house, they are entitled to the tax deductions. And they don’t have to be on the title nor the loan to save taxes.
#8 Deducting money put into a special fund for charitable contributions, even if no money currently goes to a charity.
Known as a “donor-advised fund,” taxpayers can deduct the money they contribute to such an account. The contribution is considered a completed gift. The account can have a unique name along with a checkbook. You then can cherry-pick the organizations to which you would like to donate. It is the initial contribution that triggers the charitable donation deduction, not the check to the charity. So you can choose not only to whom but when the money will go to a particular charity. Many different institutions, banks, brokerages, for instance, set up these funds. Donor-advised funds can be a wise tool in tax deduction planning. One year the standard deduction is used, and the following itemized deductions.
#9 Home Office Expense – Still can work to save taxes
If you work as an employee for a company and work from home, you could deduct home office expenses. That deduction went away in 2018. Employees now, in many cases, are reimbursed by their employers. The employer gets a tax deduction, and the employee is not out of pocket. A self-employed person, however, is still allowed to deduct home office expenses under the old rules. You must meet specific requirements and have a place in your home used exclusively for business. Part of a room qualifies. It can even be the corner of a room. This deduction rarely amounts to a ton of money, but every little bit helps when it comes to taxes. When you are self-employed, every business deduction saves income tax and self-employment tax (social security, medicare).
#10 Standard deduction on the Federal return but itemizing on the California return.
California adopted very few TCJA tax act changes. The TCJA doubled the standard deduction for federal purposes; California made no such change. Many taxpayers itemized deductions total less than the government’s standard deduction. That might not be true, however, for the California return. Taking the standard deduction for Federal purposes, in this case, and itemizing deductions for California will save taxes. You’ve got to run the numbers to know.
In conclusion, you MUST take as many legal deductions as you can when paying taxes. While some may seem small, they add up. Develop a relationship with a tax pro who can help you figure out other ways to save money.