Taxes have been with us for quite some time but as we close in on the other certainty, let’s look at 8 ways we can lower our Tax Liability.
1. Protect your heirs. This sounds simple enough but you would be surprised at how many of us overlook this simple procedure. Make sure you have beneficiary designations for your IRAs and 401(k)s. If these are not in place or up to date at the time of your demise then these will go into your estate rather than to your designated beneficiary and unfavorable withdrawal rules could cost your heirs dearly.
2. Death and taxes. Someone who is terminally ill may want to sell investments that show a paper loss. Otherwise, the “tax basis” of the property — the value from which the heir will figure gain or loss when he or she sells — will be “stepped-down” to date-of-death value, preventing anyone from claiming the loss. If you want to keep property, such as a vacation home, in the family, consider selling to a family member. You get no loss deduction, but it could save the buyer taxes later on.
3. Time claiming Social Security benefits. If you stop working, you can claim benefits as early as age 62. But note that each year you delay — until age 70 — promises higher benefits for the rest of your life. And, delaying benefits means postponing the time you’ll owe tax on them.
4. Dodge a 50% tax penalty. Taxpayers older than 70½ are required to take minimum withdrawals from their IRAs each year. Failing to do so, subjects them to one of the toughest penalties in the tax law: the IRS claims 50% of the amount that should have come out of the account. Your IRA sponsor can help pinpoint the amount of the required payout.
5. Keep careful records of the cost of medically necessary improvements. To the extent that such costs — for adding a wheelchair ramp, for example, lowering counters or widening a doorway or installing hand controls for a car — exceed any added value to your home or vehicle, that amount can be included in your deductible medical expenses.
6. Include travel expenses in medical deductions. In addition to the cost of getting to and from the doctor, you can deduct up to $50 a night for lodging if seeking medical care requires you to be away from home overnight. The $50 is per person, so if you travel with a sick child to get medical care, you can deduct $100 a day. Starting in 2013, you get a tax benefit only to the extent your expenses exceed 10% of adjusted gross income, or 7.5% if you’re 65 or older.
7. Crank in the value of deducting long-term-care premiums. As you shop for long-term care insurance, remember that a portion of the cost is deductible. The older you are, the more you can write off. For employees, this is a medical expense which means it only saves money if your medical expenses exceed 10% of your adjusted gross income (7.5% if you’re 65 or older.) If you’re self-employed, you avoid the haircut and get this deduction even if you don’t itemize.
8. Give it away. Money you give away during your lifetime won’t be in your estate to be taxed at your death. That’s one reason there’s also a federal gift tax. The law allows you to give up to $14,000 to any number of people in 2013 without worrying about the gift tax. If your spouse agrees not to give anything to the same person, you can give $28,000 a year to each individual. If you have four married kids, for example, and you give $28,000 to all eight children and in-laws, you can shift $224,000 out of your estate gift-tax free each year.
All in all, the Tax Liability from your estate may sound overwhelming, but garvey & garvey, llc CPAs can easily assist business owners and home owners with establishing a method that is appropriate for them so that there are no unwelcome surprises when the tax year ends.