Monday, October 29, 2012

Taxmageddon, part 3

Even with all the tax increases scheduled for 2013, there are still some ways you can increase your take-home pay.  Listed below are several income avenues the IRS can not touch.  Please remember to check with your tax accountant regarding the detailed qualifications of these "tax free" sources.

Tip #18:  Municipal Bonds.  Municipal bond interest is federal tax-free.  The tax-free benefit increases the higher your income, BUT caution must be taken to ensure the underlying municipality is not in dire financial condition.

Tip #19:  Pay for health insurance premiums with pre-tax income.  For now (until 2014), most health insurance premiums are tax-free.  This is scheduled to change in 2014 to help pay for the the Affordable Care Act, but for now make sure you are using pre-tax dollars to pay for these premiums.

Tip #20:  ROTH IRA and ROTH 401(k).  While amounts contributed to these retirement savings accounts are taxed, any earnings made on these contributions are federal tax-free as long as the holding period and distribution rules are followed.  Most agree that today's tax rates are lower than those projected for the future, especially 20+ years in the future.

Tip #21:  Health Related Spending Accounts.  Contributions and earnings in health related spending accounts are tax-free as long as the funds in the account are used to pay for qualified health care expenses.

Tip #22:  Car Pooling.  While commuting expenses are not generally deductible, any reimbursement of commuting expenses by fellow passengers is not reportable as income.

Tip #23:  Downsize Your Home.  Up to $250,000 ($500,000 for married filing jointly) of capital gains on the sale of your principal residence can be tax-free.

Tip #24:  Certain Employer Compensation.  In addition to current health care premiums (beginning in 2014 your health care benefits will be taxed as income), below are a few employee benefits that are not taxable.  All have limits, but every tax-free dollar is more money in your pocket - airline miles earned on business credit card use; certain employer provided education assistance; qualified adoption expense reimbursement; up to $50,000 in employer paid term life insurance; flex spending accounts for dependent care and health care; commuting expense benefits for parking and mass transit commuting.

Are you taking advantage of all your federal tax-free income opportunities?

Are you overlooking or under-reporting your your charitable donations?  Here's a few tips to help ensure you are reporting all your deductible charitable giving.

Tip #25:  Research the Charity.  Make sure the charity you donate to is a qualified non-profit organization.  The IRS has revoked the non-profit status from thousands of organizations for failure to file the proper documentation.  Ensure your donations are allowed by asking the organization to confirm their non-profit status.  You may also confirm this on-line through the IRS at

Tip #26:  Receipts and acknowledgements.  Although there are many different tax rules governing this, the basics include a receipt and donation acknowledgement from the charitable organization.  Other documentation may be required, but without the receipt and proper gift acknowledgement you will not be able to claim the deduction.  Not sure if you'll receive a gift confirmation from the charity?  Limit your donation check to less than $250.00, then use your cancelled check as a receipt.

Tip #27:  Use caution when donating a vehicle.  If the vehicle you donate is not used for the business of the organization or for training others and they simply re-sell it, your donation is limited to what they receive for it and not the usually much higher fair market value.

Tip #28:  Non-cash donations.  Keeping track of non-cash donations, such as clothing & household goods, is one of the most overlooked deductions.  Keep a paper trail for each donation, include the quality of the item and take a photo of the goods.  Only items in good or better condition can be donated.

Tip #29:  Charitable mileage.  You may deduct 14 cents per mile while driving for charitable activities.  Charitable driving miles can add up to a sizable donation.

Tip #30:  DO NOT donate cash.  Rule changes make it very difficult to claim a cash donation deduction.  So resist the urge to place cash in a collection basket; write a check so you will have a paper trail.

Tip #31:  Donating appreciated stock.  If handled correctly you can use the higher value as a donation deduction without paying taxes on the appreciated value of the stock.

Remember deducting charitable tax donations on your federal taxes will lower your tax bill thus, putting more of that hard earned income in your pocket.

Again, please discuss these tax tips with your tax accountant to make sure you follow all IRS rules and maximize your allowable deductions.

Friday, October 26, 2012

Taxmageddon, Part 2

Here are few more tax tips to help you prepare for the upcoming tax increases.  Plan now so you aren't surprised by a large unexpected tax bill at the end of next year.

2012 marks the last year the following tax provisions will be available, so, get them while you can.

Tip #6.  $1,000 Child tax credit.  The current $1,000 child tax credit will be reduced to $500 in 2013, plan accordingly.

Tip #7.  Preferred Dividend Tax Rate.  The ordinary tax dividends tax rate will no longer have a preferential tax rate of 15%, dividends will be taxed as ordinary income, 15% - 39.9% contingent upon income levels.

Tip #8.  The adoption credit.  In 2013 the $12,650 adoption tax credit will be completely eliminated.

Tip #9.  Full use of deductions and exemptions.  Also in 2013, as your income increases, itemized deductions and personal exemptions will be phased out.

Tip #10.  $2,500 American opportunity tax credit.  This college tuition tax credit expires and will not be available after 2013, regardless of income levels.

Tip #11.  Are you using your kids to lower your tax rate?  Remember your children under the age of 19 (under 24 if a full-time student) can have net unearned income taxed at their generally lower tax rate.  (Unearned income is usually investment and interest earnings).  The income limitation for 2012 is $1,900.  But be careful, investment income over this amount is taxed at the parent's tax rate.   This higher rate on excess earnings in a child's account is commonly called the "kiddie tax".

Remember the following tax breaks expired in 2011 and are no longer available.

Tip #12.   Mortgage insurance premiums deduction expired in 2011.

Tip #13.  $250 "above-the-line" deduction for unreimbursed classroom expenses for qualified elementary and secondary teachers has expired.

Tip #14.  Also expired is the general sales tax itemized deduction options versus state income tax deduction.

Tip #15.  Direct charitable contributions from a qualifying senior's IRA are also gone.

Tip #16.  Also expired in 2011, employer provided transit pass income exclusion drops from $230 per month to $125 per month.

Tip #17.  The Alternative Minimum Tax "patch" has also been eliminated.

Next time I'll include tips on how to maximize your charitable donations and review some income strategies the IRS can't touch.

Thursday, October 25, 2012


Isn't that a terrible title for a returning post?  We recently received another tax update newsletter from our tax accountant and I wanted to again share a few of the tips included in the newsletter in preparation for many of the new 2013 tax increases that will affect ALL tax payers, regardless of income levels.

Tip #1:  Start cutting costs now.  Social Security withholding will increase from 4.2% to 6.2% on January 1, 2013.  This means you will see a 2% decrease in your take home pay.  ($50,000 annually = a reduction of $83.33 per month).

Tip #2:  Child tax credit and earned income tax credit will be lower and available to fewer tax payers.  Project the impact of these reductions to tax credits in 2013 so you will know what to expect.

Tip #3:  Consider taking gains and delaying losses.  In 2013, the rates of capital gains will increase, while the benefit of losses will be worth more.  Use this to your advantage.

Tip #4:  Small business owners take action.  Health care costs and increased tax rates will reduce your cash flows.  Try to create a full year projection of income and expenses, especially important to seasonal businesses.

Tip #5:  Health care reform laws.  Understand how the Affordable Care Act will impact you and your family.  Medical expense deduction threshold will increase from 7.5% to 10%.  The purchase of health insurance will be mandatory and prepare for less take-home pay with an increase in medicare tax of 0.9% to 3.8% contingent upon withholding rates and  income levels.  ($50,000 annually = a reduction of $37.50 - $158.33 per month).

Tip #6:  Flexibility.  We will all need to remain flexible and take required action this year and next to manage our tax bills.  Keep enough liquid assets (CASH) available to take action on short notice if necessary.

Also included in this quarter's newsletter were a list of tax deductions for those who looked for or are currently looking for new employment.  The following are tax deductible, (these employment related expenses when combined with other misc. expenses are subject to reduction equal to 2% of your adjusted gross income):

Costs to prepare resumes and letters including typing, stationary and postage.
Fees paid to employment agencies, recruiters, and consultants.
Transportation to interviews including out of town lodging.
Meals while out of town for interviews related to the job hunt are deductible at 50%.
Local and long distance telephone bills.

NOTE:  When added together, tip #1 and tip #2 will reduce the annual take home pay for the $50K median income earner by $1,485.96 - $2,899.92 annually.

Since I'm out of time, please check back for a future post containing additional tax tips.

Wednesday, October 3, 2012

I Took a Quick Break From My Blogging Break Because ...

... It's here!  And, I live with procrastinators.  Yup! our first snow of autumn.  We had a long list of "must do's" to complete before the first snow, but we are yet quite a way off from finishing.  I become so frustrated because I work and work hard long hours but live with procrastinators who ... well, procrastinate. They say, things like, "don't worry, we'll get around to it" or "it will get done".  I asked, "What can I do to help you get to a point where this can be finished?"  I was told, I worked & I finished my portion of the tasks.

Regardless of the amount of work I completed, they didn't get "around to it" or "get it done" before the first snow, as promised.

Thankfully, the snow will not stay and we will see a few more warm days before the cold sets in for a long winter.  I am hoping this first snow will "jump start" my procrastinators and a few remaining projects will finally be finished up before the ground freezes - BUT I'm not going to hold my breath.  I predict several things will sit and wait until next spring or summer or maybe indefinitely, just as I'm still waiting on cabinetry projects that were promised last winter (we have a work area in the basement) and have yet to be started.