ISSUE: Income tax deadline
OUR VIEW: Tax knowledge can save dollars now and in coming year
April 15: The income tax deadline is at hand.
Whether you’ve filed for an extension on your taxes this year or have waited until the last minute to complete paperwork, or want a better strategy for the future, chances are you could be doing a better job throughout the year to save on income taxes.
That’s the assessment of seasoned investment advisor Paul Taylor, a member of the National Ethics Bureau, who makes the not-so-surprising point that many Americans think they personally pay more than their fair share in taxes.
According to 2013 Rasmussen reports, the actual number is 49 percent, nearly half.
“Come tax time, many of the other half could be doing more to legally and strategically save money,” says Taylor, an architect-turned-founder and owner of Capital Advisory Group & Tax Planners of Lake Norman and Capital Investment Advisors Inc. (CapitalAdvGroup.com).
He cites mistakes that many taxpayers are liable to make now and in future years.
Not knowing which tax deductions are available. Tax-reform measures are enacted frequently by Congress, making it hard for U.S. taxpayers to know which deductions are currently available for maximizing savings. One of the most overlooked deductions is state and local sales taxes. Taxpayers may be able to take deductions for student-loan interest, out-of-pocket charitable contributions, moving expenses to take a first job, the child care tax credit, new points on home refinancing, health insurance premiums, home mortgage interest, tax-preparation services and contributions to a traditional IRA.
Misunderstanding deduction value for medical expenses. The Affordable Care Act has altered the guidelines for tax-deductible medical expenses. Effective Jan. 1, 2013, the new policy increased the threshold for the itemized deduction for unreimbursed medical expenses from 7.5 percent of adjusted gross income to 10 percent of adjusted gross income for regular tax purposes. The increase is waived for individuals age 65 and older for tax years 2013 through 2016.
Confusing when taxes must be paid on IRA and employer-sponsored retirement funds. Traditional IRAs and most employer-sponsored retirement plans are tax-deferred accounts, which mean they are typically funded with pretax or tax-deductible dollars. As a result, taxes are not payable until funds are withdrawn. Exceptions are the Roth IRA and the Roth 401(k) and Roth 403(b). Roth accounts are funded with after-tax dollars. That’s why qualified distributions – after age 59-1/2 and the five-year holding requirement has been met — are free of federal income tax.
Overlooking tax-advantaged investments. Tax-advantaged investments can include real estate partnerships, oil and gas partnerships and suitability, which refers to how appropriate an investment may or may not be to an investor. Two of the most common types of real estate partnerships, for example, are low-income housing and historic rehabilitation. The federal government grants tax credits to those who construct or rehabilitate low-income housing or who invest in the rehabilitation or preservation of historic structures.
Uncertainty when accounting for gift taxes. The federal gift tax applies to gifts of property or money while the donor is living. The federal estate tax, on the other hand, applies to property conveyed to others, with the exception of a spouse, after a person’s death. There are several exceptions to gift taxes, including gifts of tuition or medical expenses that you pay directly to a medical or educational institution for someone else, gifts to a spouse who is a U.S. citizen, gifts to a qualified charitable organization and gifts to a political organization.
If you’ve already filed your tax returns for 2013, now is the time to look at changes in preparation for filing in 2014. If you’re a last-minute filer, it’s not too late to look at the aforementioned information in search of a lower tax bill.
To reiterate: Every American should feed patriotic about paying his or her fair share of taxes in a great country. Equally, every American can feel patriotic and completely “American” in looking for every legal deduction that can reduce the amount owed.