While not a popular holiday, April 15th is probably on your calendar – even though this year tax day is April 18th. The long-awaited day when you’re required to file your annual income taxes. However, before you do, have you included all the deductions due to you? According to Motley Fool, the IRS believes that a full 20% of eligible Americans miss out on tax breaks worth up to $6,269 each year.
To help ensure that this doesn’t happen to you, GW & Wade Principal David L. Brodsky, JD, MBA, MSA, and CPA discusses tax deductions many people aren’t aware of, yet may have a positive impact on lowering your taxable income.
Before delving into these hidden gems, it’s important to make this key distinction:
Tax Credit vs. Tax Deductions
While both tax credits and tax deductions help reduce your overall income tax liability, there are a few key differences.
The Internal Revenue Service (IRS) explains it this way: Tax credits provide a dollar-for-dollar reduction of your income tax liability. This means that a $1,000 tax credit saves you $1,000 in taxes. On the other hand, tax deductions lower your taxable income and are equal to the percentage of your marginal tax bracket. The IRS gives the following example: If you’re in the 25% tax bracket, a $1,000 deduction saves you $250 in tax (0.25 x $1,000 = $250).
At GW & Wade, we maximize both approaches. However, without a doubt, a tax credit outweighs a tax deduction, since it reduces your tax liability dollar-for-dollar.
Here are what we believe to be some of the most overlooked tax deductions and credits:
#1 – Medicare Premiums When Self-Employed
Self-employed individuals can write off 100 percent of their health insurance expenses, according to Brodsky. However, what many people don’t realize is that self-employed individuals can also deduct 100% of their (or their spouse’s) Medicare premiums, ever since a change in IRS policy in 2012. Brodsky says that most individuals overlook this deduction because they do not pay the Medicare premiums directly; rather, the premiums are withheld from their Social Security benefits and the payment goes unseen by the indiviual.
#2 – Sales Tax versus Income Tax
According to the IRS, if you file a Form 1040 and itemize deductions on Schedule A, you have the option of claiming either state and local income taxes or state and local sales taxes (you can’t claim both).
Brodsky says that there are times when claiming your state’s sales tax could be more useful. For example, let’s say you’re retired and you purchased an expensive vehicle last year. In this instance, claiming your sales tax as a deduction may be more useful than your local income taxes given the heightened sales tax.
Here’s the IRS Sales Tax Calculator.
#3 – Accelerate Income to Accommodate Large Deductions
Brodsky noted that there are years when his clients have large deductions. To take advantage of the situation, he encourages his retired clients to accelerate their income by taking a larger IRA distribution. In general, you can’t change what you earn, but you can manipulate IRA distributions.
Let’s say you’ve reached full retirement age, you’re retired, and your mother resides in an assisted living facility. She has a pension and, therefore, she’s not your dependent. However, you paid $30,000 last year to help defray the cost of her care. In this instance, you may be able to deduct the full amount you paid. What’s more, because of your age and non-working status, you’re probably in a lower tax bracket, making it an ideal time to take a higher IRA distribution so you can write off the entire $30,000 expense.
#4 – Pet Owner Tax Breaks
If you own a pet, there are several tax breaks you may be eligible for, specifically:
If you moved for a new job last year, then your best friend’s shipping/travel costs may be tax deductible. However, time and distance rules apply. If you foster animals, then any unreimbursed out-of-pocket expenses you incur, such as food or mileage, may also be tax deductible when traveling to and from the shelter’s facilities. Also, if you require a service animal, then some of the costs to maintain your pet’s health may qualify as a deduction.
#5 – Leased Vehicle Excise Tax
A frequently overlooked tax deduction is the excise tax on leased vehicles. Brodsky says that a lot of people miss this deduction because it’s embedded in their lease and they don’t receive a bill from their town or city. Nevertheless, excise tax associated with a leased vehicle is still tax deductible.
#6 – Child and Dependent Care Tax Credit
According to TurboTax, an often-overlooked tax credit is the child and dependent care credit, particularly if you pay your child-care bills through an employer reimbursement account. The software giant says the law allows you to run up to $5,000 of such expenses through a tax-favored reimbursement account at work; however, up to $6,000 can qualify for the credit, meaning that you may be missing out on claiming an extra $1,0001.
#7 – Full-Time Employee & Self-Employed
Many people have full-time jobs as well as self-employed side gigs. Keep in mind, that even though you may contribute to your employer-sponsored 401(k) retirement account, you may also be able to contribute to a SEP IRA retirement account, given your additional self-employment income. Ultimately, lowering your taxable income even more.
At GW & Wade, we consider tax planning a year-round activity and an integral part of your overall wealth management strategy. That’s why we offer tax planning and preparation services to all our clients. By bringing tax-related issues to the forefront, we can help you identify any potential savings opportunities and achieve a more thorough financial strategy.
If you have questions regarding the preparation of your 2016 tax returns, or would like to undertake a more comprehensive approach to improving your overall financial well-being and protecting the things you value most, please contact us.
Additional Tax Planning Resources
Here are two helpful resources to help you prepare your 2016 income tax return:
- 2016 Federal Tax Rates, Personal Exemptions & Standard Deductions
- Massachusetts Department of Revenue
The information provided above is general in nature and is not intended to represent specific investment or professional advice. Any results cited do not necessarily represent the experience of other GW & Wade clients. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship.
Clients of the firm who have specific questions should contact their GW & Wade Counselor. All other inquiries, including a potential advisory relationship with GW & Wade, should be directed to:
Laurie W. Gerber, Client Development
GW & Wade, LLC