Valerie L. Harmon, CPA
Certified Public Accountant
As professional tax preparers, we know that some valid deductions may be overlooked and other opportunities to reduce taxable income or tax are sometimes not taken. This article will discuss some opportunities to reduce taxable income or tax liability that are sometimes forgotten.
Taxpayers may choose to use either the standard deduction or itemized deductions (Schedule A), whichever is more advantageous. Examples of itemized deductions include medical expenses, state/local income taxes, property tax, mortgage interest, charitable contributions, and miscellaneous deductions. If you find that your itemized deductions are just less than the standard deduction, you may benefit by itemizing every other year through prepaying real estate taxes every other year, accelerating a January mortgage payment, and “bunching” charitable contributions or medical expenses every other year. Individuals are “cash-basis” taxpayers; that is, deductions are reported for the tax year in which they were paid.
If the amount of your state and local income taxes paid is low (typically, due to a low withholding requirement from wages), consider deducting sales tax paid instead. Sales tax paid can be calculated using the IRS sales tax tables based on income and family size; and sales tax paid on major purchases, such as a car can be added to the table amount. The deduction for private mortgage insurance (PMI) premiums was extended through December 31, 2016. Points paid to purchase your primary personal residence may be deductible. Deductions for charitable contributions may include noncash goods or mileage and expenses for volunteer work. Proper receipts for donations and records of volunteer work and mileage must be kept. For more information about itemized deductions, please see http://www.irs.gov/pub/irs-pdf/i1040sca.pdf.
Federal taxable income may be reduced by adjustments for IRA or HSA (health savings account) contributions, and these contributions can still be made for 2016 up to April 18, 2017. You must be enrolled in a qualified, high-deductible health insurance plan to contribute to an HSA. Eligible K-12 teachers may reduce taxable income by up to $250 for out-of-pocket expenses. Self-employed persons may be eligible to deduct self-employed health insurance premiums.
Tax credits are available for higher education expenses (please see our July 2016 newsletter), or for energy efficient residential property improvements that were placed in service by December 31, 2016 (please see our September 2016 newsletter). If you own stocks in a taxable brokerage account that pay dividends, you may be entitled to a tax credit for foreign tax paid. Check your brokerage Form 1099-DIV for any foreign tax paid.
Tax professionals at Buckingham Financial Group utilize various resources to stay up-to-date on tax code developments. We would be happy to review your tax situation and provide a personal estimate to prepare your 2016 tax returns.