Untapped Tax Deduction Strategies You Can Use

Untapped Tax Reduction Strategies
Untapped Tax Reduction Strategies

April is Tax Day and for millions of people it means preparing all necessary paperwork for your taxes. To help ease your pain, we will give you some of the best secrets from professionals to help you keep your hard-earned money where it belongs – your bank account.

Pool your deductions.

If you are a wage-earning employee and your taxes are automatically deducted from your salary, then the best thing to do is to collect your itemized deductions. Itemized deductions are allowable expenses that individual taxpayers can disclose in their federal income returns in order to decrease their taxable income.

This means that if you have intended deductible expenses such as medical and dental expenses for the next few years, you can try to settle them as early as this year. All your expenses which exceed 2 percent of your adjusted gross income can be claimed because they will be considered as one big payment (instead of installment) for your Schedule A tax form. By doing so, your deductions will be greater as compared to before.

State Sale Tax Rates

This is only relevant for citizens whose states do not impose income tax rates. This deduction claim is advantageous because you get to choose only one between these two: deducting state and local sales states or deducting state and local income taxes.  Most of the time, tax payers tend to choose income-tax states because it paves a greater advantage in comparison to the other. The Internal Revenue Service (IRS) provides a detailed table of allowable deductions for the residents of the said states including a calculator for deductions in specific states and income levels. Though this is the case, you cannot find every bit of information in there.

For example, if you chose to buy construction materials, car or any other vehicle, then you can add the state sales tax that was included in your purchase and as shown in the IRS table for your state. This is applicable if the sales tax rate you paid does not go beyond the state’s sales tax rate.

There are deductions available for those who work at home

 If you are a freelancer or just simply working from your home, then there are plenty of deductible expenses that you can get. One great example would be the space in your home that you consider as your official working space. This may be the place where you conduct business meetings, a place where you work on your projects, or where you meet future clients of the business. You can deduct the space of the place used for official business purposes in addition to your utility fees for that specific work space. Basically, if you have a two-bedroom house and you use one bedroom as your official workspace then you can deduct half of your yearly rent in additional to the utility expenses that you incurred in that specific workspace. Aside from these, you can also deduct the bill you receive from your mobile expenses, internet subscription, office supplies, computer equipment, shipping fees, advertising expenses, membership subscription, and business trips among others.

Deducting your Magazine and Television Subscriptions.

Being self-employed contains many perks, one of which is that you get to deduct all of the expenses that you incur because of your work. For example, television subscriptions can be deducted from your expenses if you use this mainly to benefit your line of work. Another would be magazine subscriptions that you use in order to research for your competition, business improvements, etc.

How?

Use these subscriptions exclusively for your work.

Health Coverage Can Save You.

If your boss gave your job to someone from overseas because of some rough competition, then the government will cover up to 80 percent of your health care costs. In order to avail of this perk, you must be getting pension from the government after your previous employer discontinued his retirement plan or you must be getting Trade Adjustment Assistance (TAA) benefits.

Searching for A New Job

If you were laid-off just recently, specifically just in the past year, then you can deduct the expenses that you incurred while you were job hunting. You must be mindful with your expenses and make sure that you track each and every one of them. Keep your receipts for your printing expenses on mailing your resume, subscriptions for headhunters, mobile phone expenses, travel expenses, gas and even career coaches. As long as they are all related to your effort in finding a new job, then make sure that you tally everything.

Count the Blessings You Give to Other People.

If you are a giver, then your charitable contributions to society will pay off. For example, if you foster a few animals from the shelter and provide for their food, then you can deduct this from your taxes. Another would be if you drive to and from places for your local shelter volunteers, then you can deduct 14 cents for every mile you spend gas on. Helping can be rewarding, just make sure that you write down every penny you give away.

Start Saving for Your Retirement Plans Today

­Putting money to your Roth IRA account as early as now will pay off in the future. By making sure that you are retirement-ready starting today, you will not be required to pay taxes once you withdraw your Retirement Savings from your Roth 401(k) or Roth IRA account. The Roth 401(k) account does not have income requirements. All you have to do is find a company that offers this benefit, work there, and then put money in your Roth 401(k) account. By dong this, you can deduct the money you put for your retirement in your taxable income. What is even more exciting is that in the future, you can withdraw the funds that you put in that account free of tax charges!

Though this is the case, there is a certain threshold for the contribution that an employee can give to his Roth 401(k) account. The most recent is the 2016 limit of $18 000, and $6 000 catch-up contributions for those who are 50 years old and above. Aside from having all gains as tax-deferred, this money will not be counted towards your income. Moreover, the limits are consistent for your account, but the contributions are considered for your income and all interests or benefits are considered tax-free.

If your employer offers a plan with an after-tax option for the 401(k) then you can save up more money for your retirement.

Never Forget About the Dividends That You Reinvested

If you have investments in extra shares from the dividends that you get from your mutual fund, then take note that every time you reinvest, the premise income value for your taxes grows along with your investments. This just means that the taxable capital gain becomes lower especially when you choose to sell your shares.

By overlooking your reinvested dividends, you tend to overpay your taxes. You should subtract your cost basis from your proceeds of sale so that you can get the gain that your received from reinvesting your dividends so that you will not make this expensive error. There are programs and tools that can help you in such calculations. Examples of the said programs are Home and Business Tax preparation, Cost Basis Lookup, and TurboTax Premier. These tools can go as far as solving for your taxable income and making sure that you will not make mistakes with the subtraction for your reinvested dividends.

The perk of your parents’ payment for your student loan interest

If your parents pay for your student loan, then the IRS will consider the transactions as a form of your Mom and Dad giving money to you. If you are not considered as a dependent, then you can deduct as much as $2,500 of student loan interest from your taxes. All thanks to your parents, your taxes are now lower.

Child and Dependent Care Expenses Are Good for Your Taxes

If you think that deductions take a heap load of burden from your back, then be prepared for the glee of tax credit. Tax credit decreases your tax statement per dollar that you give into an account.

However, you have to be mindful since this tax credit can easily be disregarded. The neglect usually happens for people who pay their child care expenses at work by reimbursements.

As long as your qualified expenses are not greater than $6,000, then you can get the credit. However, the previous $5,000 limit applies to those who still use their reimbursement accounts. This means that if you have used up your $5,000 limit in your reimbursement account at work, and you still have some excess expenses in your pocket for your work-related child care, then you can get up to $1,000.

This is an improvement as compared to the child care credit limit of $4,800 in the past with the same rule of a $5,000 limit for the reimbursement account available at work. The new $6,000 limit lets you keep $200 at the minimum.

The Talk on Earned Income Tax Credit

According to the IRS, the 25 percent of tax payers who are qualified to get the Earned Income Tax Credit (EITC) fail to claim the mentioned tax credit. The reason can be as simple as the rules being too complicated, or sometimes those who qualify are just not aware that they are a part of the qualified pool of people qualified to get the tax credit.

The EITC can be a big help to taxpayers. In 2015 the refundable tax credit that can be claimed ranges from $500 up to $6,200.  This refundable tax credit was made to help low to moderate salary workers in their wages. This credit, however, does not just apply to those belonging in the low-income margin.

Anyone, especially the white-collared workers, can be classified as “low income” if they have been laid off, were given a pay cut, or if they were given fewer work hours in the previous year. This tax credit can be applicable to the households and individuals who are in the “bourgeois” sector of the society as long as they fit any of the aforementioned categories.

The refund that you can get from the EITC depends on factors such as family size, marital status, and income. If you do not have to pay taxes for this year, then you must file a tax return to get your money from the EITC. Aside from this, you can also get your unclaimed EITC refund if you were not able to do so for the past three tax years.

Mortgage Points and Lessening Taxes

Your mortgage can be refinanced so that you can deduct the points you paid for your brand new house. You can do so by deducting the points over the life of a loan. For example, if you have a 15-year mortgage plan, then you can subtract 1/15th of the points per year. By doing so, you get around $66 per $1,000 of points that you pay.

Moreover, if you choose to sell your house or refinance again, you can still get the points you were not able to deduct when you pay your loan in the same year. This is assuming that you will not refinance with the same lender.

Tax Reduction Strategies For High Income Earners

If you are a business-owner, then this information is very crucial: you get to pay lower taxes when you put your money on dividends rather than your salary. If you earn $400,000 or less a year, and you put a chunk of your income into the dividends of your company, then you are required to pay only 15% of your income tax. Take note that you still have to put a reasonable amount of your income to your wage because the IRS may give you unwanted notice.

Untapped Tax Reduction Strategies
Untapped Tax Reduction Strategies

Owning a home can deduct your taxes-Deductions from Mortgage Interest

The mortgage interest deduction is one of the most straight-up deductions for those who choose to itemize. It can easily be claimed on your Schedule A. However, your mortgage should be secured by your home which can be a house, any place you sleep in, cook in, and of course it has to have a toilet in it!

If your mortgage is $1,000,000 or less, then the interest you pay on your mortgage can be deductible when you use it to pay for your home’s construction purposes. The mortgage may be used to help you renovate, construct, or buy your house.

However, when you get a new mortgage to renovate, construct, or buy a new home, it will not be covered by the mortgage interest deduction.

As long as your home secures another loan, then you can deduct your interest on your mortgage of up to $100,000. The important criterion is that your house is used to secure the other loans that you make.

Prepaid Interest Deduction

The interest that you paid when you got your mortgage can be deducted in a hundred percent basis in the year you paid it together with other mortgage points that you had to pay for.

If you used your mortgage for construction, renovation, or if you refinanced it, then you can also deduct the points that you paid in the same year.

However, if your refinance because you wanted to pay less interest or because you wanted to turn your 30-year mortgage into a 15-year mortgage to lessen the years that you have to pay for a loan, or any other reason other than improving your home, you have to deduct the points to the life of your mortgage. For example, if you refinance into a 15-year mortgage and you pay $5,000 in points, then 1/15 x $5 000 = $333.33. This just means that you get to deduct in your taxes approximately $333 per year for the next 15 years.

Let’s say that you choose to refinance again.

Given the scenario that 2 years after your first refinancing, you choose to do it again. Given the example above, we would have deducted $666 ($333 *2 years). This leaves us with $4,334 which you can also deduct in full in the year that you choose to completely pay for your second refinancing. If new points were paid for the new loan, then you have to do the process again.

You must tally and include your house mortgage interests and points in your Schedule A of your IRS Form 1040.

Your creditor will provide you with a Form 1098 which will include the interest that you paid for. If you cannot find it here, then you can see them provided in the HUD-1 settlement sheet which should have been given to you when you formally bought your house or when you finalized your refinancing.

Follow these requirements and get your mortgage interest in full:

  1. Your other loans are backed up by your permanent address. Your permanent address is where you usually settle in.
  1. Paying the interest of your mortgage is something that people usually do in that state.
  2. The interest or points that you paid do not cost more than the usual interest charged in that state.
  1. You utilize the cash method in terms of accounting for your taxes. This means that you record the amount of income you receive once you get it and you subtract your expenses during the same time that you made that expense.
  1. You did not pay your points instead of the sum that is usually recorded separately from the settle statement. Examples are inspection fees, appraisal fees, attorney fees, title fees, and property taxes.
  1. The amount that you paid must at least be the same as the points that were charged to you. These funds do not necessarily have to be applied in the points because there may either be down payment, earnest money, escrow deposit, or any other funds that you paid before or when you paid for your account. Note also that your creditor or mortgage broker must not have lend you the money you used to pay for them.
  2. You used your loan to reconstruct, renovate, or buy your house.
  1. The points were calculated as a percentage of the mortgage’s principal amount. This is not always true since this will depend on your loan processing.
  1. The amount is provided in your settlement statement – which may be your Form HUD-1 – as the points billed for your mortgage. These points may have been settled either by you or your seller.

If you were able to complete all the requirements, then your mortgage points could be 100% deducted in the same year that you choose to take out your mortgage.

Choosing to sell or refinance your home can deduct points fully

Here is another good news: if you end up paying your mortgage earlier than you expected, or if you choose to refinance, you can subtract the remaining amount in the year that your mortgage ends. This is the perk of having your mortgage end early. Though if the scenario consists of you refinancing with the same creditor, then your points should be subtracted over the course of the new loan.

Assuming that you forgot to itemize your deductions during the year that your loan expired or ended, then you can simply stretch out your mortgage points over the life of your loan and then just subtract it in the following years that you do choose to itemize.

However, title and escrow fees, appraisal fees, and notary fees are not tax deductible since they are not considered as interest.

It is always best to ask a tax specialist to review the steps that you have chosen to take since the guidelines provided by the IRS can change from time to time. Your questions will also be easily answered by tax professionals.

Deducting Taxes thanks to your Property

Your Schedule A can let you deduct the following: real estate taxes that you pay, and the property taxes that you paid when you bought your new house. This is because if your mortgage has an escrow account, then you real estate property taxes were already accounted for in your annual escrow statement.

Private Mortgage Insurance and Federal Housing Administration Mortgage Insurance Premiums

The amount that you paid for your PMI as mortgage interested in your Schedule A can be deducted from your taxes, assuming that you itemize. However, this is only for the loans which were paid for in 2007 or later.

Aside from your PMI, there are also FHA, VA and Rural Housing service. These can be deducted in your taxes as well, but since they usually take more work, it is best to get a tax professional that can help you with your calculations.

Take note that the PMI is when you took a mortgage that you were not able to provide 20% down payment for. Since the creditor will require for an insurance, you can deduct the premium of the said insurance IF your income is not greater than $100,000.

Tax Reduction Strategies For Your Rental Property
This can get quite a handful. The most important thing to do here is to make sure that you always take note of when you use your vacation house:

  1. If you do not rent out your vacation house for more than 14 days and you are the only         one using it, then you can deduct your mortgage interest and real estate taxes on Schedule A.
  1. Schedule E will deduct your expenses if you rent your vacation house for more than 14 days and you use it for fewer than 15 days (or may be 10% of your total rental days, whichever is higher), then it will be considered as rental property.
  2. You rent out your house for a part of the year and you use it yourself for more than 14 days or more than 10% of your renting days, and have all the necessary records.

Home-buyer Tax Credit
If you claimed this for a house you bought after April 8 2008 and before January 1, 2009, then you must compensate 1/15th of the credit over 15 years without interest.

The IRS has a calculator if you need help with your calculations. If you choose to move to another permanent address, then your unpaid loan must be added to your income tax and must be filed on the next tax return.

By law, you do not have to pay for the credit if your house was bought in 2009, 2010 or in the early 2011. But if your house was sold within 36 months after you bought it, then you have to compensate for the full credit amount. You must compensate for it using your tax return in the year your permanent address stopped being so.

However, these rules are less complicated for uniformed service members, foreign service workers and those in the intelligence community who were sent to at least 50 miles from their permanent address.

You can pay your mortgage 13 times a year

When you pay for your mortgage earlier, your deductions will be higher. If you haven’t done this method the year before, then you must note that as a homeowner, you can make 13 mortgage payments this year.

This can only be an advantage if you itemize your taxes and if you use IRS Form 1098 to write-off your home mortgage interest. This is especially beneficial if you are expecting that your taxes will be heavier next year. This may mean that you get to pay your taxes this year instead of the next.

This is just a give and take scenario wherein if you pay 13 payments this year, then the next you can pay for 11 monthly payments. This will help ease your tax burden for the following year.

Given below are possible deductions that you may apply:

Advertising

Accounting fees

Bad debts

Auto expenses

Amortization

Building repairs and maintenance

Business association membership dues

Business travel

Banking fees

Board meetings

Cafeteria health-insurance plan (requires plan)

Collection Expenses

Education and training for employees (new)

Deductions made for charity contributions due to business

Janitorial/Cleaning services

Consulting fees

Computers and tech supplies

Commissions to outside parties

Credit card convenience fees

Costs of goods sold

Education for improvement of skills and knowledge

Food expenses due to business purposes

Depreciation

Employee wages

Conventions and trade shows

Discounts to customers

Equipment

Equipment repairs

Entertainment for customers and clients

Franchise fees (new)

Exhibits for publicity

Gifts for customers ($25 deduction limit for each)

Freight or shipping costs

Family members’ wages

Furniture or fixtures

Home office

Health insurance

Group insurance (if qualifying)

Investment advice and fees

Internet hosting and services

Interest

Losses due to theft

License fees

Legal fees

Maintenance

Materials

Management fees

Moving

Medical expenses (with plan)

Mortgage interest on business property

Office supplies and expenses

Outside services

Newspapers and magazines

Pension plans

Payroll taxes for employees (includes Medicare taxes, Social Security and unemployment taxes)

Prizes for contests

Parking and tolls

Postage

Publicity

Rebates on sales

Rent

Real estate-related expenses

Royalties

Retirement plans

Research and development

Software and online services

Safe

Safe-deposit box

Taxes

Subcontractors

Storage rental

Website design

Telephone

Utilities

Workers’ compensation insurance

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ratetake

Martin - Head of Real Estate and Finance at RateTake
Martin is Head of Real Estate and Finance division at RateTake. He creates content that helps people understand and make the right decisions for their financial future.
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Written by ratetake

ratetake

Martin is Head of Real Estate and Finance division at RateTake. He creates content that helps people understand and make the right decisions for their financial future.