Frequent tax law changes have made the tax code very complicated; only the informed taxpayer can take advantage of tax-cutting opportunities that remain.
Here are some suggestions you should consider if you're interested in cutting your taxes.
1. Reduce your consumer debt. The interest you pay on consumer debt is not deductible. Consider shifting consumer debt to a home-equity loan (where available and not to exceed $100,000) to maintain deductibility for the interest. Don't rush into anything, however. Consider loan origination costs and points you may have to pay. Also, realize that if you can't make the payments on the home-equity loan, you could lose your house.
2. Rehabilitate an old building. One tax break that may be attractive to you is the credit for rehabilitating old buildings - either commercial or certified historic structures. If you don't want to do the work yourself, consider investing in partnerships that rehabilitate old structures.
3. Watch for AMT liability. The alternative minimum tax (AMT) is the one you pay when too many tax preference items reduce your regular tax below a certain amount. If you use preference items to reduce your taxes - such as accelerated depreciation, private activity bond interest, etc. - you may want to shift income and deductions to keep the alternative minimum tax from applying to you.
4. Time any change in marital status with a view to minimizing taxes. Among the areas that could be affected are deductibility of IRA contributions, lost itemized deductions, and a shift to a different tax bracket. You might be able to cut your tax bill by delaying or accelerating a marriage or divorce.
5. Contribute to a retirement plan. Retirement plans are still an excellent tax shelter. Consider a a retirement account strategy to reduce your self-employed income, even part-time or in a second business. If you're an employee, find out if your company has a 401(k) or other plan and make contributions to it. If you qualify, you should also consider an IRA.
6. Use your vacation home wisely. If you own a second or vacation home, find out whether you get a better tax break by treating the property as a second residence or as a rental property. The number of days you personally use the home is crucial, so get details immediately.
7. Avoid the "kiddie" tax. Check the income of any children under the age of 19 (24 for full-time students). Unearned income beyond a certain amount will be taxed at your highest rate. Shifting investments or making other adjustments may be appropriate.
8. Make your hobby a business. If you're making money from a hobby, turn your hobby into a business so that you can write off your expenses. You must be able to demonstrate that you engaged in the activity for a profit. To do that, conduct the activity as a business. Keep records, and get a separate bank account for the activity. The IRS will expect your sideline business to show a profit in three out of five years, or you'll have to prove your profit motivation in order to deduct losses.
9. Don't overlook medical deductions. If you help to support an elderly relative who lives in a nursing home for medical reasons, the cost of the nursing home may qualify for the medical deduction. If you make improvements to your home for medical reasons, the cost of such improvements are medical expenses to the extent the improvements do not increase the value of your home. That includes such things as widening doorways for wheelchair use or modifying the home to accommodate an individual with a medical problem.
10. Take the child care credit if you qualify. If you pay for child care services while you work or go to school, you may qualify for the child care credit. The credit is allowed only for children under the age of 13. You must report on your tax return the name, address, and taxpayer identification number of the care provider.
There are other tax-cutting strategies in addition to those mentioned here. If you would like assistance in selecting tax-saving strategies that make the most sense in your situation, please call.