Winter is coming…and so is tax season. While Tax Season is not quite as scary as that last season of Game of Thrones, navigating your taxes alone can be pretty mind numbing. With frequent tax law changes, even more so now in this unprecedented year of 2020, the tax code can be very complicated. Be the one sitting on the iron tax thrown this tax season using the following tips to make sure you are the savviest, and informed, taxpayer. Use the following suggestions to cut your taxes down as much as possible:
1. Reduce your consumer debt
The interest you pay on any consumer debt you owe is not deductible from your taxes. Did you know you can shift that consumer debt to a home equity loan? Well, if you did not know, now you do, and this tactic can maintain deductibility for interest. While you should not rush into making this switch, it is something to consider. With that being said, be sure that you are aware of costs you will have to pay regarding switching the debt over such as loan origination costs and points you may have to pay. You may also want to consider whether this option is going to be feasible for you to pay the home equity loan payment because if you cannot, you could risk losing your home.
2. Rehabilitate an old building
Now, I am not telling you to go and rehabilitate any buildings like you find in Westeros, but if you do rehabilitate an old building, you can reap tax benefits from your work. For rehabilitating an old building, you can receive a tax break with will award you credits which equals more money in your pocket. The building that you rehabilitate can either be commercial or historic, like the Targaryen kingdom…just kidding! If you are not feeling up to the challenge of doing the work yourself, the good news is that you do not have to. Instead, you can choose to invest in in a partnership that rehabilitates old buildings. This way you will still receive the tax credit, without even lifting a finger.
3. Watch for AMT Liability
AMT stands for Alternative minimum tax, and this is something that you need to watch out for because if you pay too many tax preference items, this could reduce your regular tax below a certain amount. If you use preference items to reduce your regular tax below a certain amount, you may want to shift income and deductions to keep alternative minimum tax from applying to you. Examples of these preference items are accelerated depreciation, private activity, and bond interest.
4. Time any change in marital status with a view to minimizing taxes
In Game of Thrones, who you marry, or who you divorce, can be a life-or-death decision. While it is not so serious in the tax world, it still has some bearing on your tax bill. Surprised that the timing of your marriage or divorce could affect how much you pay in taxes? You may want to reconsider those dates you had in mind to finalizing these big life moments because it could save, or cost you, a lot of money. Among the areas that could be affected are the deductibility of your IRA contributions, lost itemized deductions, and a shift to a different tax bracket. With that being said, you may be able to cut your tax bill by delaying or accelerating your marriage or divorce proceedings.
5. Contribute to a retirement plan
Retirement plans are still an excellent tax shelter. Putting money into a retirement account is a great strategy to decrease your self-employment, part-time, or second business income. If you are an employee, you should find out if your company has a 401 K or something like this plan that you can make contributions to. Another option is to find out if you qualify for an IRA.
6. Use your vacation home wisely
If you own a second, or vacation, home, you may be able to reap some financial benefits from it. You can get a better tax break by treating the property as a second residence or rental property. Keep in mind, the number of days that you personally use the home. This information is crucial, so be sure to get those details as soon as possible!
7. Avoid “kiddie” taxes
If you have dependent children, you should check the income of any children under the age of 29, or 24 for full time students, that they are receiving. Any unearned income they may have accrued beyond a certain amount will be taxed at your highest rate. In this case, shifting investments, or making other investments, may be appropriate to combat this issue.
8. Make your hobby a business
During the pandemic, we have all picked up a hobby or two. The good news is that your hobby could make you money and help you save on your taxes. If you choose to turn your hobby into a business, you can write off the expenses accrued from running the business. To do this, you must be able to demonstrate that you engaged in activity to make a profit. If you move forward with operating like a business, be sure to keep detailed records and have a separate bank account for all business activity. The IRS will want your business to show proof of profit in three out of five years or you will have to prove your profit motivation to deduct losses.
9. Do not overlook deductions for medical taxes
If you help support an elderly relative who lives in a nursing home for medical reasons, the cost of that nursing home may qualify for medical deduction. If you make improvements in your house, the cost of these improvements are medical expenses to the extent that the improvements do not increase the value of your home. Some of the improvements can include things such as widening doorways for wheelchair use or modifying the home to accommodate someone with a medical problem.
10. Take the childcare tax credit if you qualify
If you pay for childcare services while you work or go to school, you may qualify for the childcare credit. This credit is available for children under the age of 13. On your tax return, you must report the name, address, and taxpayer identification number of the care provider. Do not let this Game of Taxes get the best of you this tax season. Today, we only covered a short list of 10 tax cutting strategies, but there are many more to be discovered. For assistance in selecting the tax-saving strategies that make the most sense for you and your needs, contact us here!