101 Tax Tips

  1. Don’t over look itemized deductions including medical expenses, auto excise taxes, state and local sales taxes, interest on mortgages and home equity loans, points, real estate taxes, casualty and theft losses, cash and non-cash charitable donations and investment interest expenses. In addition, many state tax jurisdictions do not conform to the federal tax laws regarding deducting unreimbursed employee business expenses such as job seeking expenses, continuing education, cell phone charges, tools, briefcases, luggage, computers, online service fees, trade journals, travel and meals and entertainment. As a result, you may be entitled to significant tax savings on your state income tax return.
  2. Looking for a tax-advantaged way to save for a child’s education? You can now contribute $2,000 per year per child into an education savings account, and up to $15,000 per year into a 529 plan. You can even make five years of 529 contributions, up to $75,000, all at once. Just make sure not to contribute to that child’s 529 account for the next four years, and to file a gift tax return by April 15electing to spread the contribution over five years.
  3. Participating in a 401K and 403B plans are one of the best tax shelters available to you during your working years. That’s because your 401K and 403B contributions reduce your taxable earnings and grow tax-deferred. Maximize any possible tax deferrals available through employer 401K or 403B plans.
  4. Prepay your anticipated state income tax balance due by 12/31 of the tax year, in order to be able to claim it as a current year deduction.
  5. Use your credit card to make qualified tax deductible purchases on or before 12/31. Even though you may not pay your credit card bill until after the new year, you can still claim the deduction in the year you purchased the items.
  6. Where possible, hold investments long term (more than a year) before selling, to get favored tax rates.
  7. Find a method you are comfortable with to track your deductible expenses.  Suggested:  Pay all deductible items by check, and mark in your check register by using a different color highlighter for each type of expense (Such as green for medical, blue for taxes, yellow for charity, etc.).
  8. If your itemized deductions are "borderline" (may or may not be enough to exceed standard deduction), try to "bunch" deductions by selectively paying those you can control in a year you plan to itemize, and minimize them in a year you plan to take the standard deduction.
  9. You can claim as dependents your unmarried children under age 19 (under 24 if a full time student for some part of five months of the tax year) regardless of their income, providing you can prove you are providing more than half of their support for the entire tax year.
  10. Your federal income tax refund received for the prior year is not taxable on your federal return.  Your state tax refund is taxable only if you itemized deductions for the year in which the tax was paid, and received a tax benefit from deducting that tax on Schedule A.
  11. Don't forget these commonly-overlooked medical deductions:  mileage or transportation for medical care, cost of maintaining tax-deductible medical items such as eyeglass repair, hearing aid batteries, and contact lens solutions.
  12. Prepay real estate tax bills by 12/31, in order to claim it as a current year deduction.
  13. If you have significant expenses connected with your employment, negotiate with your employer to pay or reimburse as many as possible under an accountable plan, which means you are paying the expenses with his money, not yours.  If you instead have your taxable wages increased to pay the expenses, you may not get the full benefit of the deductions, due to the additional payroll taxes and other limitations on employee expense deductions.
  14. If you are saving for a child's education, consider transferring those assets into the child's name, under your state Gifts To Minors Act, which allows at least part of the investment income to be taxed at the child's lower rate.
  15. Instead of giving cash, gift appreciated stock (which you have held more than a year) to your church or favorite charity.  You get to deduct the fair market value, and escape paying tax on the gain.
  16. Don't forget to deduct your out-of-pocket expenses in performing volunteer services for your church or a local charity. Also, uniforms and equipment required for these volunteer activities are also deductible (i.e. Scout leader uniforms).
  17. When considering financing options, remember that your "after tax" cost of home equity interest is lower than the actual percentage stated on the loan.  For example, if you are in a 33% marginal (Fed/State) tax rate, and itemize deductions, 9% home equity interest really costs you only 6% after tax, so it is a better deal than an 8% consumer car loan.
  18. Keep track of all gambling activity for the year, including raffle tickets and bingo, so you will be able to document deductible losses up to the amount of any winnings you have by year-end.
  19. If you have an unincorporated sole proprietorship business, hire your dependent children under 18 to perform business tasks at a fair market wage.
  20. If going through a divorce with children involved, get guidance from a knowledgeable tax professional on how to best structure your custody arrangement in order to assure that valuable tax benefits (such as the child tax credit and the new higher education credits) won't be lost. 
  21. Since interest income is taxed at your marginal tax rate and dividends are taxed at 15%, consider shifting some of your investments from interest paying accounts to dividend paying stocks.
  22. Check last year's tax return to determine if there are any items which you can carry over to this year, such as capital losses, net operating losses, investment interest expense, charitable contributions and alternative minimum tax credits.
  23. Be sure to get professional tax guidance with your return, to make sure you have not missed taking advantage of any possible deduction or credit to which you may be entitled.
  24. Make sure that your employer has you classified correctly as an employee or self-employed contractor.
  25. If you are married, make sure that you are using the most advantageous filing status. It might be better to file separate returns include: a) when one spouse has very large medical bills and  b) when one spouse has very large miscellaneous business or similar deductions.
  26. If you’re planning to sell mutual fund shares close to year-end, try to do so before the fund declares its annual taxable distribution. Many funds do this in December, so confirm the exact date with the fund manager.
  27. If you support your parents, they do not need to live with you to be claimed as your dependent.
  28. When buying a home, the loan origination fee (points) is deductible on Schedule A.
  29. If you can't deduct points because of insufficient itemized deductions, they can be amortized over the life of the loan, using Form 4562.
  30. Try to avoid penalties by having a sufficient amount of tax withheld or pay estimated taxes. Also, avoid excessive IRA contributions and insufficient IRA distributions.
  31. If you have more than one employer, it is possible that you will have an excess of Social Security tax withheld. If so, you can get a credit for the excess on Form 1040.
  32. If you are self-employed, be sure to take an adjustment for 1/2 of your SE tax, on your Form 1040, and also for any health insurance payments.
  33. If you are self-employed, consider establishing an office in your home to enable you to deduct part of your home expenses.
  34. Changing the number of allowances you claim on a W-4 form will increase your take-home pay, but decrease (any applicable) tax refund when you file your tax return.
  35. If your spouse owes unpaid taxes, child support or student loans which affect your refund when filing jointly, consider applying for injured spouse relief.
  36. Don't overlook the available Education Credits for you and your children.
  37. When withdrawing funds from your IRA before age 59 1/2, to buy a first home or pay qualified education costs, be sure to file Form 5329 to claim the exception from the 10% penalty.
  38. Consider including tax-exempt municipal bonds in your investment program.
  39. Make sure you complete schedule "H" for all household employees earning more than $1,000/year.
  40. For those who put business miles on a personal auto, make sure you keep a written daily log of business miles.  You will almost always have more mileage if you keep daily track of it and you will also meet the record keeping requirement and not loose your deductions because of lack of recordkeeping.
  41. If you are making an IRA deduction and find you have no tax liability consider making it a nondeductible contribution, thereby converting a portion of your future distributions into nontaxable income; or consider making it a Roth IRA contribution in which the qualifying distributions would be nontaxable.
  42. If you are self-employed and paying for your medical insurance, don't forget a portion of the premium is an adjustment to income with the balance being deductible as a medical itemized deduction.
  43. Don't forget that if you have employer provided child care benefits reported on box 10 of your W-2 that you must file a Form 2441 for Child and Dependent Care Credit or that benefit will become taxable.
  44. If you pay the medical expenses for your children or parents or other close relative, you might be able to deduct those expenses even if they are not your dependents, provided they are dependents just  for medical purposes.
  45. If you are subject to the phase-outs of the Hope Scholarship or Lifetime Learning credits, you might still be eligible for the $4,000 tuition deduction. This deduction is available even if you do not itemize.
  46. If you are leaving your employer and are under age 59 1/2, if you take your 401K or similar deferred plan distribution, you had better roll it over into an IRA within 60 days or else it will be taxable income and also might be subject to a 10% excise tax.  The employer might withhold 20% but your tax will be at least 15% income tax (and maybe 28% or more) plus 10% excise tax, which is higher than the tax withheld by the employer.
  47. Track down those reinvested dividends for any stock you sell. They’ll add to your stock basis and reduce taxable gain.
  48. If you are leaving employment and have your employer's stock in your 401K or ESOP, speak with a tax pro about taking the stock out as stock not cash, in order to take advantage of the rules for "Net Unrealized Appreciation."
  49. If going through a divorce and the property settlement involves an employer savings plan or pension plan, be sure your attorney explains to you how a Qualified Domestic Relations Order works and the tax consequences to you of the QDRO.
  50. Be sure you know and tell your broker when you sell, which shares you are selling.  Selling specific shares, or if you have a mutual fund, using the average cost of the shares, can give you immediate capital gains savings, and defers other gains until a later time.
  51. If your name changes, (marriage, divorce, etc), notify the Social Security Department ASAP. If not, the IRS will delay the processing of your tax return.
  52. Think about sales taxes. You might want to purchase certain big-ticket items before the end of the year. Instead of deducting your state and local income taxes, you can instead claim sales taxes paid during the year, including taxes paid on vehicles, boats, motorcycles, RVs, and home-building materials.
  53. Taxes due on a large capital gain, are due when it occurs. The related tax should be sent in as an estimated payment. A penalty can be assessed if not paid. 
  54. Consider creating an Individual Retirement Account (IRA). The tax benefit can be considerable, but can be limited by your income level, and if covered by an employer's plan.
  55. If your expecting to owe a large balance due when you file your tax returns, complete a new W-4 ASAP with employer, so that more taxes are withheld during the year. If self-employed, increase your estimated payments for the remainder of the year.
  56. If you are unable to file your completed returns by April 15th , be sure to file for an extension. Remember, an extension only gives you time to file, not pay the amount you owe. If you think you’ll end up owing, you must pay the amount you estimate you’ll owe with your extension form. In addition, although payment was sent with the extension (Form 4868), you must still file your 1040.
  57. Update your estate plan for any changes in your life. Letting your estate documents become outdated could expose you to higher taxes.
  58. If your home is partly rented, the cost of work done to the rental portion can be used to reduce your rental income. Be sure to compile this data during the year.
  59. If making non-cash charitable contributions, be sure the recipient supplies you with documentation. It will be needed when you complete your tax return.
  60. Invest in "tax managed" or "tax efficient" funds (low dividends and capital gain distributions) to defer taxation until you sell or redeem shares.
  61. If taking a 401K or IRA distribution, and are under age 59-1/2, consider using one of the SEPP methods (section 72t) to avoid the additional tax and still obtain periodic payments.  Depending on the method chosen, the amount of periodic payment received can be structured to your cash needs.  Disadvantage is that you are required to maintain such payments for at least 5 years or until age 59-1/2, whichever is longer, so this might not be viable for short- term need.  If you change payments at any time after beginning, the 10% additional tax will be retroactively applied to all payments taken.
  62. If your claimed as a dependent on someone else's return, don’t claim a personal exemption on your tax return.
  63. Make gifts before year-end to utilize your tax-free $15,000 gifting allowance. You can give this amount to as many individuals as you like.
  64. If you have predictable medical and child care expenses during the year, consider using your employer-sponsored Flexible Spending Account to set aside pre-tax money for these expenses.  Downside is that the money must be spent during the year or any remainder is forfeited.
  65. If a household employee cares for your dependent who is under age 13 or for your spouse or dependent who is not capable of self care, you may be able to take an income tax credit of up to 30% of your expenses. To qualify, you must pay these expenses so you can work or look for work. If you can take the credit, you can include in your qualifying expenses your share of the federal and state employment taxes you pay, as well as the employee's wages.
  66. If you worked for more than one employer, check whether you may have overpaid social security taxes withheld from your wages.
  67. Set up a Keogh, SIMPLE, or SEP retirement plan before year-end if you’re self-employed and don’t already have a plan. This will give you tax-advantaged savings for retirement and will reduce this year’s taxable income too.
  68. Consider a Medical Savings Account if you work for a small employer and have a high deductible medical insurance policy.  Advantages are tax-free interest on the account, above-the-line deduction on your 1040 (don't need to itemize to claim), and funds remain available from year to year (unlike FSAs).
  69. If you are paying back on student loans, interest paid in the first 60 months of repayment is deductible (up to $2,500) if you meet income limits and other qualifications.  You do not have to itemize deductions to be eligible for this deduction.
  70. Consider turning that "hobby" into  a sole proprietor business, by documenting expenses, acting in a business-like manner,  etc.  Your reasonable and necessary business expenses could be deductible, including Section 179 expensing of business equipment.
  71. Educational assistance benefits you receive from your employer under an educational assistance program are tax-free, up to $5,250 each year.  If your expenses exceed the amount reimbursed, and are paid with your own funds, you may also qualify for the Hope credit, the Lifetime Learning Cedit or an educational itemized deduction for these excess expenses.
  72. If your spouse does not work, or works for an employer without a pension plan, fund a deductible IRA for them.
  73. If you are a sole proprietor and hire your children to work for you (reasonable work, competitive salary, et al) gift them the money to fund either a deductible IRA or a Roth IRA.  If their salary is not high enough to create a tax liability, the Roth IRA may be a better choice (tax deferred growth), potential tax free distribution later.
  74. Give appreciated stocks, bonds, or mutual funds to your minor children. The dividends (and capital gains distributions) will likely be low enough to be nontaxable to them for many years and any gains on sale will be taxed at their (supposedly) lower tax rate (15% vs 20%). If child is under 19, be aware of "kiddie tax" rules.
  75. If you’ve made a loan that you’re now unable to collect, you may be entitled to a bad debt deduction. It’s important to be able to show that you tried to collect, so take the necessary steps before year-end.
  76. When you retire, determine if you have made any after-tax contributions to you defined benefit pension plan and calculate the appropriate nontaxable amount of each payment using the Simplified Method.  This is a direct reduction of the taxable pension payment.
  77. Be sure and claim the Child Tax Credit for your minor dependents under age 17.  If you have three or more eligible children, also calculate the Additional Child Tax Credit on Form 8812.
  78. Buy EE and I U. S. Savings bonds for your children (in parent's name) for educational/college fund.  If redeemed for such use, interest is tax-free.
  79. Be sure and claim the Earned Income Credit if you meet the income/qualified child limits.  Credit is "refundable" and can result in a refund exceeding your withholding.
  80. If you’re holding mutual funds in a retirement account, your investment gains shouldn’t trigger any immediate tax. Just be aware that when distributions are made (other than from a Roth IRA), they’ll be taxed at ordinary income rates. If you anticipate significant appreciation, you may want to own those mutual funds outside of a retirement plan so any future gains would be eligible for the preferential capital gains rates.
  81. If you expect to be able to claim the EIC at year-end, have your employer make Advance EIC payments to you (Form W-5) during the year.  This allows you to get a tax-free advance in your paycheck each pay period.
  82. If you are laid off, terminate, or retire from you company in or after the year in which you turn 55, you can withdraw funds from your qualified retirement plan (401K or 403B) without having to pay the 10% additional early withdrawal tax.  If you rollover the account to an IRA you will have to wait until age 58-1/2 to get this break.
  83. If you have to pay an early-withdrawal penalty to your financial institution for withdrawing a time deposit before maturity, that penalty is deductible "above the line" as an adjustment to your gross income.
  84. If you are planning on getting married near the end of the calendar year (or even in January), do some "what if" calculations of your individual and MFJ returns to see if there is a tax benefit to be gained by either waiting or accelerating the nuptial date.  Avoiding the "marriage penalty" by waiting until January might be enough to fund the honeymoon!  On the other hand, a single individual marrying a non-working spouse could see a "marriage bonus" by scheduling the wedding in December.
  85. If over 65, don't forget that Medicare B premiums are deductible as medical expenses (if you itemize).
  86. Long-term care insurance premiums are also deductible (based on age of insured).
  87. If you are separated from your spouse for more than six months by the end of the year, the spouse with a child living with him/her may be eligible to file as Head of Household, which may be more advantageous than filing Married Filing Separately.
  88. If planning to buy a house, try to close early in the year, to take maximum advantage of deductible interest and property tax payments.  Origination fees (points) might also be deductible in full.
  89. Inventory valuable possessions (photographs, video) and household furnishings and store in your office or safety deposit box.  May be useful in case of Casualty or Theft Loss deduction.
  90. Do tax planning with your tax advisor at least twice a year, early in the year plan tax-saving strategies which might not be available later.  Later, perhaps November, determine if you should sell losing investments and take capital loss -- either to offset capital gains or ordinary income (up to $3,000/ year, remainder to carryover to future years).
  91. If you are single and have a dependent who lives with you, check to see if you qualify for the lower tax rates available to a "head of household" or surviving spouse filing status.
  92. Don't pay taxes on income that isn't taxable, such as gifts, inheritances, life insurance proceeds, child support payments, personal injury damages, disability benefits, new car rebates.
  93. Be sure that your Form W-2 and all Form 1099's are correct. If they're incorrect, have them corrected as soon as possible so that the IRS's and state's records agree with the amounts shown on your tax return.
  94. If you have rental property and want to sell and reinvest in other like-kind property, consider Section 1031 exchange to defer taxes.  You will need to use a third-party escrow company and real estate or tax pro to make sure it is done correctly.  This cannot be used for property having personal use (residence).
  95. You can borrow tax-free on your cash-value life insurance policy.  This is technically a loan (usually at below market rates), but you are not generally required to pay it back.  The amount borrowed, and not repaid before death, will reduce the death benefit of the policy. 
  96. Plan to use the 1040 tax form, instead of the 1040A or 1040EZ, to make sure you don't overlook any deductions or credits when preparing your return.
  97. If filing electronically, avoid "Rapid Refund" loans—very expensive for short-term loan.
  98. If you and/or your spouse are over 65 and/or blind, don't forget that your standard deduction is increased by $1,000 for each "condition" (up to $4,000 for married filing joint).  A single individual's standard deduction is increased by up to $2,500).
  99. When you refinance, any points charged can only be amortized over the life of the new loan.  If you were amortizing points from a previous finance at the time, any remaining points are deductible in the year of the refinance.
  100. Retain backup copies of all your tax returns, official tax documents and receipts for a minimum of 3 years.
  101. File your tax return electronically. You get the added assurance that your tax return has been accepted and received by the IRS free of mathematical errors and omissions.  In addition, if you are getting a refund, you can receive it quicker, in many instances in less than 2 weeks.