Recently, we began looking at a number of steps you can take that may help you save on your taxes. Following are a number of additional steps you can take to help save on taxes.
Year-End Tax Tips • Consider paying a portion of deductible expenses (for example, self employmenthealth insurance premiums, or, if you itemize, medical expenses andhome mortgage interest payments) that will be owed next year, by December 31of this year. This is especially beneficial in the case of self-employment healthinsurance premiums, which are now 100% tax deductible. • On the flip side, if possible, delay receiving – until January of next year –payments that are owed to you for self-employment work performed, or productssold (or, in some cases, payments for work performed for an employer – forexample, bonuses owed) for this year. Note, however, that this only works if youconduct your business and file your taxes on a “cash basis.” • Check your investments – mutual funds, individual stocks and bonds (if you haveany) – to ascertain which are under-performing. If these under-performinginvestments show an overall loss since you originally bought them, considerselling them by December 31. Doing so will allow you to deduct those lossesagainst any capital gains you have during the tax year. Moreover, if there areexcess losses (losses over and above your capital gains for the tax year), you candeduct those excess losses against up to $3,000 of ordinary income earned duringthe tax year. (For example, if you sell stock you bought at $6,000 for $4,000 onDecember 20, 2007, you can take a $2,000 deduction against ordinary incomeearned in 2007.) Often-Overlooked Tax Deductions Finally, whenever you file your final tax return – be it April 15th or at a later, extendeddate – be sure you’ve checked to see if you qualify for (and, if you do, take advantageof), the following often overlooked tax deductions: • Self-employed Health Insurance Premiums and Self-Employment Tax: Ifyou are self-employed, you can deduct 100% of the insurance premiums you pay.Additionally, you can deduct 50% of the self-employment tax you owed. Both ofthese deductions are especially beneficial, since you are allowed the deductionswhether or not you itemize other deductions. • Points: If you bought a home this year, in most cases, the points you paiddirectly to your lender will be considered part of your current home mortgageinterest. So, if you itemize, you can deduct the cost of the points as part ofyour home mortgage interest costs. But note, points paid on refinancing cannotbe deducted currently (except, in some cases, for a percentage of the refinanceloan used to make home improvements). Rather, the points must be deductedratably each year over the course of the loan. • Home Office Deduction: If you are self-employed, or are employed but conducta side business (or, in some limited cases, you’re employed but do work at home)and use a specific room or rooms (or part of a room or rooms) in your home to runyour business or do work (such as an office, or as a space to prepare items thatyou sell), you may be able to deduct a percentage of the costs (such as utilities,repairs and insurance) you pay on your home. However, to qualify for thisdeduction, the area in your home must be used for business on an exclusiveand regular basis. However, note that the IRS is very strict in its reading of whether or not your useof the part of your home for business purposes meets the exclusive and regularuse test. Moreover, there are a number of additional requirements and exceptionswhich can disqualify you from taking the home office deduction. • Entertainment Costs: Generally, you can deduct (on your Schedule A, or, ifyou’re self-employed, on Schedule C) 50% of your non-reimbursed costs (such asmeals, or theater or sports tickets) for entertaining clients and customers, as longas the costs are business-related. To qualify, the entertainment must be directlyrelated to or associated with the active conduct of your business. Such costsinclude entertainment directed towards furthering and continuing an existingbusiness relationship, or towards acquiring additional business clients orcustomers. But again, note that the IRS sets very strict guidelines for whatqualifies as entertainment directly related to or associated with the conduct ofyour business. • Automobile Deductions: You can deduct non-reimbursed automobile costs thatare incurred when using your vehicle for business. You can calculate these costsby using either the Standard Mileage Allowance (the number of miles you drivefor business multiplied by the allowance, as set by the IRS); or the ActualVehicle Expense method (the total cost of running your automobile divided bythe percentage you use the vehicle for business). (In some limited cases, youmust use the AVE method.) However, although you can use this deductionwhether you’re an employee or self -employed, as an employee, you generally(with very few exceptions) cannot deduct the cost of driving to and from yourprimary place of work, or paying for parking. • Lottery Winnings: First, the bad news: if you had lottery, raffle or other prizewinnings this year, you must add these winnings to your ordinary income and paytaxes on them. What’s more, if the prize for the lottery or raffle you win is in theform of merchandise, you have to add the fair market value of that merchandise toyour ordinary income and pay taxes on that. Now, the good news: if you itemize, you can deduct the cost of lottery or raffletickets from your reported winnings. And, since lotteries and raffles areconsidered a form of gambling, if you itemize, you can deduct the gamblinglosses you had this year, but only up to the amount of the winnings you receivedthis year. (For example, if you won $2,500 on a lottery scratch ticket in 2007,but lost $3,000 on bets at the racetrack, the total winnings on which you’d have topay taxes for 2007 would be $500). • Bad Debt Deductions – If you lend money or sell a product on credit, and thedebt is not repaid, this is considered a bad debt and may be deductible. However,the IRS treats business debt and non-business debt differently, in two ways. o First, a business bad debt is deductible, even if it is only partiallyworthless. A personal bad debt must be completely worthless before youcan deduct it. o Second, a business bad debt is fully deductible from your gross income(on Schedule C, or Schedule F, if your business is a farm). A personal baddebt is considered a capital loss (on Schedule D) and the deduction islimited. Finally, this word of advice: since the rules governing all of the above deductions (andother “tax tips” noted) have many exceptions and limitations and can be verycomplicated, be certain to consult with your CPA or tax attorney while preparingand before filing your tax return.
[NOTE: Much of the above information was gleaned from various portions of Rick Shaffer’s E-book, “Your Bottom Line: Fifty Steps to Firm Financial Footing.” (For more information, go to BestMoneyinfo.com.]
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