Planning Your Itemized Deductions
Tax rates, deductions, and phase outs seem to be changing constantly, making the timing of income and expenses trickier than ever. For most taxpayers, however, the mantra should continue to be: defer income and accelerate deductions. The following deduction strategies may help you lower next year’s tax bill:
Bunch Deductions. Try “bunching” your expenses to make sure you exceed the deduction “floor.” Bunching two years’ worth of expenses into one year enables you to increase your total deductions over the two-year period and avoid losing the tax benefit. However, be aware that the alternative minimum tax (AMT) can creep up on you if you have a lot of deductions.
Pay State Estimated Tax Early. You may be able to gain a larger Federal deduction if you pay your state fourth-quarter estimated tax payment by December 31st and the AMT does not apply. If you are subject to AMT, paying early won’t benefit you.
Donate Appreciated Property. If you donate appreciated capital gain property to charity, the amount of your deduction is the value of the property rather than its cost, and you are never taxed on the amount of appreciation. The charity also benefits because it can sell the property and not pay taxes on it. In the case of most property donations, an annual deduction limit of 30% of adjusted gross income (AGI) applies.
Optimize Investment Interest Expense. If you have capital gains or dividend income and also have investment interest expenses, you may be able to calculate the break-even point, so you can optimize both the lower capital gain and dividend tax rate and the investment interest deduction.
Claim All Available Home-Related Deductions. If you operate a business out of your home, you may be able to take an office-in-the-home deduction if the office is your principal place of business. The home office space must be used regularly and exclusively for business. You won’t be able to take the deduction if your home office is used for any personal reasons. You may deduct a portion of your homeowners insurance, home repairs, and utilities, as well as all improvements to the office if they relate to the conduct of business. Homeowners depreciate the portion used for business; renters deduct a portion of the rent.
You may be able to deduct interest on a loan for a second home, provided your primary and secondary mortgages do not total more than $1 million. If you rent out the second home, you must use it personally for more than 14 days or more than 10% of the rental days, whichever is greater, for it to qualify as a personal residence. In addition to mortgage interest, you may be able to deduct property taxes and prorated monthly portions of your points paid over the life of the loan. If your second home qualifies as a personal residence, and you rent the home out for more than 14 days a year, you may also be eligible to deduct the appropriate portion of the upkeep, insurance, utility, and similar costs against rental income.
Understand the Tax Aspects of Divorce. While legal fees for divorce are not deductible, fees for tax advice related to the divorce are. Be sure to get these details stated separately on invoices to support the deduction.
Divorcing couples may want to consider having child support payments reclassified as alimony. Child support is not included on the recipient’s tax return and the payer cannot deduct it. Conversely, alimony is included as income on the recipient’s tax return and it's an above-the-line deduction for the payer. By splitting the difference, both parties could save money.
During property settlement negotiations, be aware of the potential tax liability associated with assets. Two assets may have the same current value but very different tax cost. If one has a low tax basis, and you sell the property, tax on the gain will reduce the available proceeds. So, assets are not necessarily “equal” for tax purposes even if they have the same value.
More Tax-Saving Strategies
- Lower your own taxable income by shifting income to other family members.
- Consider your plans for the near future. How will marriage, divorce, a new child, retirement, or other events affect your year-end tax planning?
- Take maximum advantage of your employer’s Section 125 cafeteria plan, 401(k) plan, health reimbursement arrangement (HRA), or health savings account (HSA).
- Consider filing separately if one spouse has numerous itemized deductions that are subject to a floor amount.
- Watch out for the AMT. If you take too many deductions, exemptions, and credits, you may risk being subject to the AMT.
The information contained in this article is for general use and while we believe all in formation to be reliable and accurate, it is important to remember individual situations may be entirely different. Therefore, information should be relied upon only when coordinated with professional tax and financial advice. Neither the information presented nor any opinion expressed constitutes a representation by us or a solicitation of the purchase or sale of any insurance or securities products and services. Written and published by Liberty Publishing, Inc. Copyright © 2013 Liberty Publishing, Inc. TXITEMD0-04
The information provided is not written or intended as specific tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.