INCOME TAX SAVINGS FOR INDIVIDUALSKimberly A. Lawrence, CPA
INCOME Consider investments that generate tax exempt income and income with favorable tax rates such as stocks and bonds. Consider offsetting capital gains by selling investments that are doing poorly. Review pension and annuity income, IRA distributions and Social Security benefits as income, for the portion if any is exempt from taxation.
ADJUSTMENTS TO GROSS INCOME Penalties on early withdrawal of savings accounts Alimony paid Retirement savings Self employment tax
ITEMIZE DEDUCTIONS &EXEMPTIONS Consider itemizing your deductions instead of taking the standard deduction. Standard Deduction Single $5,600 MFJ $11,600 Personal Exemption $3,700
MEDICAL EXPENSES Medical and dental expenses are deductible to the extent they exceed 7.5% of your adjusted gross income. Medical expenses include Unreimbursed payments for doctors visits, exams and treatment, dental visits, eye exams, prescription eyeglasses and contacts, medicine, ambulance services, lab fees, x-ray services, surgery or hospital care, hearing aids, crutches, canes, orthopedic shoes, etc.
MEDICAL EXPENSES CONT. Amounts paid as voluntary premiums under Part B of Medicare (supplementary medical insurance benefits for the aged and disabled) are deductible as medical care, as are voluntary premiums under Medicare Part A (basic Medicare) Medical transportation costs can be deducted at 16.5 cents per mile driven for each medical visit. Parking fees, public transportation, tolls, airfare and up to $50 per night for lodging are allowable expenses.
MEDICAL EXPENSES CONT. Qualified long-term care insurance premiums are deductible as medical expenses, but are subject to age limitations. To qualify for the deduction, the long-term care policy must provide coverage only for qualified long- term care services be guaranteed renewable have no cash value use refunds or dividends only to reduce future benefits
MEDICAL EXPENSES CONT. The long-term care premium annual limits for an individual whose attained age before the close of the tax year are: 40 or less, the limit is $340 more than 40, but not more than 50, the limit is $640 more than 50, but not more than 60, the limit is $1,270 more than 60, but not more than 70, the limit is $3,390 more than 70, the limit is $44,240
STATE AND LOCAL TAXES Deductible taxes include local and state income taxes, personal property taxes, and real estate taxes. Pay real estate taxes, mortgage interest, and state taxes that are due after the end of the year in December so they can be deducted in the current year. The election for taxpayers (on Schedule A of Form 1040) to deduct state and local general sales and use taxes, instead of state and local income taxes, has been extended for two years so that it applies for tax years beginning before 2012.
CHARITABLE CONTRIBUTIONS Charitable Contributions Charitable Miles – 14 cents/mile Always get a receipt Donations of cash, clothing, furniture, household goods, and vehicles Mileage and other expenses associated with volunteer work is also tax deductible.
MISCELLANEOUS ITEMIZED 2% Miscellaneous Deductions Tax preparation software and fees, Investment fees and expenses IRA custodial fees Safe deposit box Legal fees for producing taxable income Trust administration fees
OTHER TIPS – ESTIMATED PAYMENTS Plan ahead! If your income is more than you expected, consider paying estimates. Consider using the annualization method when computing underpayment of estimated tax penalties. Don’t forget to consider early withdrawal penalties and AMT considerations when planning and making estimated payments.
FILING Filing your return on time will help expedite processing of your return and allow you to get a refund earlier. Recommend filing certified return receipt If you use a tax preparer you will likely be required to file electronically unless you send a signed statement opting out.
2011 TAX RATES Single Married Filing Jointly Income Range Tax Of the amount Income Range Tax Of the over amount over$0 - $8,500 10% 0 $0 - $17,000 10% 0$8,501 – 34,500 850 + 15% 8,500 $17,001 – 1,700. + 15% 17,000 69,000$34,501 – 83,600 4,,750 + 25% 34,500 $69,001 – 9,500. + 25% 69,000$83,601 – 17,025 + 28% 83,600 139,350174,400 $139,351 – 27,087.50 + 139,350$174,401 – 42,449 + 33% 174,400 212,300 28%379,150 $212,301 – 47.513.50 + 212,301379,151 and over 110,016.50 + 379,150 379,150 33% 35% 379,150 and 102,574 + 379,150 over 35%
RECORDKEEPING TIPS Records that can support a deduction or could impact your federal return should be kept a minimum of 3 ye ars Records regarding large purchases including homes, cars, stocks, etc. and business or rental property records should be kept longer Keep copies of your tax returns and tax form packages
TENNESSEE HALL INCOME TAX Tax rate 6% Taxes certain interest and dividends Nontaxable income include Interest from bank and money market accounts Dividends from a publicly traded REIT Interest earned on bonds from Tennessee Bonds of US Government Interest from certificates of deposit
GIFTING Giving up to $13,000 to individuals or trusts per year tax- free to each person you choose will reduce your estate value Direct payments for tuition and medical expenses is not a reportable gift Lifetime gift tax exclusion is $5,000,000 in 2011 and 2012 for federal purpose. This is not recognized by Tennessee
2013 PROVISIONS Unearned Income Medicare Contribution 3.8% surtax is imposed on net investment income Interest, dividends, royalties, rents, capital gains, passive income from a trade or business or income from the business of trading in commodities or financial instruments Excluded items: Interest on tax-exempt bonds, veteran’s benefits, gain on the sale of a principal residence, trade or business income and retirement plan distributions
2013 PROVISIONSUnearned Income Medicare Contribution Cont. The tax is imposed on the lesser of: Net investment income, or The excess of Modified Adjusted Gross Income over $250,000 joint ($200,000 single)
ADVANTAGES: Conversion - Rollovers are not subject to the 10% early distribution tax.
ADVANTAGES CONTINUED: Rollovers and transfers to a Roth account can be made from any qualified retirement account including 401(k) and 403(b) plans. Appreciation is tax-free. Net operating losses can offset Roth income
CONTRIBUTIONS - Can make contributions after age 70 ½ if the taxpayer has compensation and meets AGI limits Retired couple could contribute $12,000 each year (including the “over-50 make-up” amount) into Roth accounts. Can make nondeductible contributions to a traditional IRA and convert to a Roth regardless of AGI. The account could grow tax free indefinitely.
DISTRIBUTIONS Tax-free distributions are especially beneficial if your tax rate will be higher when you retire. No required distributions at age 70 ½. Distributions are not included in calculating modified adjusted gross income for taxability of social security benefits. Contributions may be withdrawn any time without tax or penalty. If the taxpayer is at least 59 ½ and has held the Roth account for at least five years, the earnings may be withdrawn tax and penalty-free.
DISADVANTAGES: Contributions to Roth IRAs are never deductible for income tax purposes. Income tax rates could be higher in years of conversions and contributions than in years of distributions. Tax law changes could remove tax-free treatment on earnings.
DISADVANTAGES CONTINUED: Ordinary income tax on the amount rolled over from a traditional IRA to a Roth IRA. If have nondeductible and deductible IRAs, cannot choose to roll over only the nondeductible amounts. The amounts must be prorated based on the balances of each type. A 6% excise tax applies if an individual exceeds the aggregate regular Roth contribution limits.