As the tax season approaches, it’s essential to be aware of various tax benefits that are often overlooked by taxpayers. The tax law’s complexity has grown significantly, making it impossible to cover everything in a single article. However, this guide provides a comprehensive overview of over 20 lesser-known tax considerations that could potentially save you money.
Capitalizing on Tax Benefits in a Low-Income Year
If you find yourself in a low-income year, there are strategic tax moves you can make to maximize your benefits:
- Capital Gains Rates: Take advantage of the zero capital gains tax rate for taxpayers with low income. This means that if you sell assets that have increased in value, you will not owe any capital gains tax on the profits.
- Roth Conversions: Consider converting traditional IRA funds to a Roth IRA in a low-income year for a favorable tax outcome. Roth IRA contributions are made with after-tax dollars, but withdrawals in retirement are tax-free. By converting during a low-income year, you can minimize the amount of taxes you pay on the conversion.
Unveiling Hidden Deductions
Explore less common deductions and credits that could significantly reduce your tax liability:
- State and Local Taxes Limitation: Be aware of workarounds in some states to mitigate the $10,000 limitation on itemized deductions for state and local taxes. For instance, some states allow taxpayers to deduct property taxes paid to local governments, even if they have already reached the $10,000 limit.
- State Income Tax Refund: Understand the tax implications of state income tax refunds, especially if you took the standard deduction in the previous year. If you received a state income tax refund in the current year but itemized deductions in the previous year, you may need to pay taxes on a portion of the refund.
- Social Security Taxes Deduction: Self-employed individuals can deduct half of their self-employment tax as an adjustment to income. This deduction is often overlooked, but it can significantly reduce your taxable income.
Utilizing Tax Credits and Benefits
Make the most of available credits and benefits to reduce your tax burden:
- NOL Carryforward: Take advantage of net operating loss carryforwards from prior years, subject to certain limitations. A net operating loss occurs when your business expenses exceed your revenue. You can carry forward this loss to future years and deduct it from your taxable income.
- Military Reservist Travel Expenses: Armed forces reservists can deduct qualifying travel expenses related to their service. This includes costs for transportation, lodging, and meals incurred while traveling to or from drill weekends or other reserve duty activities.
- Child’s Private School Expenses: Use Sec. 529 college savings plan funds (up to $10,000 per year) for private school tuition for kindergarten through grade 12. 529 plans are tax-advantaged savings accounts that allow you to accumulate funds for future education expenses.
Leveraging Energy and Environmental Credits
Explore credits related to energy and home improvements to reduce your tax liability and promote sustainability:
- Home Energy Improvement Credit: Benefit from an enhanced tax credit for energy-saving home improvements, now with an annual limit of $1,200 and a credit rate of 30%. This credit applies to a wide range of improvements, such as adding insulation, installing energy-efficient windows, and replacing heating and cooling systems.
- Home Solar Credit: The federal tax credit for residential solar-power and battery systems has been extended until 2033, with new provisions for battery storage technology. This credit can significantly reduce the cost of installing solar panels and batteries, making it a more affordable option for homeowners.
- Clean Vehicle Credit: Qualify for credits when purchasing both new and used clean vehicles, subject to specific criteria. The amount of the credit varies depending on the type of vehicle and its battery capacity.
Miscellaneous Tax Considerations
Don’t forget these often overlooked tax aspects that could save you money:
- Gambling Losses: Deduct gambling losses up to the extent of your gambling winnings, provided you itemize deductions. However, you cannot claim gambling losses if you take the standard deduction.
- State Income Tax Deduction for Non-Income Tax States: Residents in states without income tax can deduct sales tax instead. This can be a significant benefit for taxpayers in these states.
- Spousal IRA: Maximize IRA contributions for a non-working spouse based on the working spouse’s income. This allows couples to save more for retirement even if one spouse does not have earned income.
- Reinvested Dividends: Keep track of reinvested dividends to accurately calculate your basis when selling mutual fund shares. Your basis is the amount you paid for an asset, and it is used to determine your taxable gain or loss when you sell the asset. Reinvested dividends increase your basis, so it’s important to keep track of them to avoid overpaying taxes.
- Worthless Stock: Claim losses promptly for securities that become worthless to avoid challenges from the IRS. If you own stock that becomes worthless, you may be able to deduct the loss on your tax return. However, you must claim the loss promptly, typically within the year the stock became worthless.
- Lifetime Learning Credit: Consider the Lifetime Learning Credit for post-secondary education expenses beyond the first four years. The Lifetime Learning Credit provides a maximum credit of $2,000 per year for qualifying education expenses, such as tuition, fees, and books.
- Charity Volunteer Tax Breaks: Qualify for deductions on out-of-pocket costs incurred while volunteering for qualified charities or government entities. If you volunteer your time and services to a qualified charity or government entity, you may be able to deduct certain out-of-pocket expenses, such as transportation costs, meals, and lodging.
- Self-Employed Expenses: Deduct various expenses, including travel and health insurance, if you are self-employed. Self-employed individuals are eligible to deduct a wide range of business expenses, including travel costs, health insurance premiums, and home office expenses.
- Summer Camp Expenses: The costs of day camp during the summer may qualify for the child and dependent care credit. If you pay for day camp for your children under the age of 13 so that you can work, you may be able to claim the child and dependent care credit.
- Medical Dependent Deduction: Include medical expenses paid for certain individuals who do not qualify as dependents based on income. Even if an individual does not qualify as your dependent based on income, you may still be able to deduct medical expenses you paid for them if they meet certain criteria.
- Income in Respect of a Decedent (IRD) Deduction: Understand the often overlooked deduction related to income taxable to a decedent’s estate. Income in respect of a decedent (IRD) is income that was earned by a deceased person but not collected before their death. The recipient of the IRD can deduct certain expenses related to the income, such as estate taxes and attorney fees.
Remember, this is just a general overview of some lesser-known tax considerations. It is always best to consult with a tax advisor to discuss your specific situation and ensure you are maximizing your tax benefits. Our team of experienced tax advisors is here to help you navigate the complexities of the tax code and maximize your savings. Please give us a call today to schedule a consultation.