Income Tax Return Planning Strategies

Each year tax laws change as well as the rules. Deductions from previous years may not be available whereas new deductions may be available. A yearly review of taxes paid could very well reveal savings that could add up to hundreds if not thousands of dollars. Here are just a few ideas from various websites on tax saving strategies for older adults.

Deductions and Reductions in Taxable Income

• In some states, certain disabled veterans can get breaks on their income tax.
• A certain portion of the home may be deductible for business purposes if a small business is conducted in the home.
• A professional tax advisor can help reduce taxable earnings on investments such as stocks, bonds and mutual funds.
• Strategies can be implemented to reduce taxable income to reduce the amount of Social Security that is also subject to taxes.
• Deductions are available for taking care of dependent parents.
• Running a small business in the home can result in additional deductions such as mileage, utilities and the out-of-pocket cost of long term care insurance premiums and health insurance premiums.
• For charitable contributions donate stocks instead of cash as a contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset, and you never have to pay tax on the profit.
• Don't donate stocks or fund shares that lost money as it is better selling the asset, claiming the loss on your taxes, and donating cash to the charity.
• Fund a Roth IRA for a grandchild as soon as that grandchild has a job as grandchild does not have to fund the IRA out of his or her pocket directly.
• make sure to rollover inherited 401(k) accounts to an IRA to take advantage of the stretch provision for those inheriting the account.

Tax Credits

Tax credits are always the most desirable way to decrease taxes. Deductions or adjustments to gross income only reduce the amount of income subject to taxes. For example, a deduction of $100 in a 25% tax bracket results in a $25 savings in taxes. On the other hand, a tax credit of $100 results in $100 of tax savings. Most of the tax credits available are for younger families with children or for those with earned income. Here are the tax credits that are most likely to be used by families in their retirement years.

Reverse Mortgage Interest

A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. With a reverse mortgage, you retain title to your home. Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on home equity debt.

Home Equity Debt

If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt.

Home equity debt is a mortgage you took out after October 13, 1987, that:

• Does not qualify as home acquisition debt or as grandfathered debt, and.
• Is secured by your qualified home.

Example.
You bought your home for cash 10 years ago. You did not have a mortgage on your home until last year, when you took out a $20,000 loan, secured by your home, to pay for your daughter's college tuition and your father's medical bills. This loan is home equity debt.

Home equity debt limit. There is a limit on the amount of debt that can be treated as home equity debt. The total home equity debt on your main home and second home is limited to the smaller of:

• $100,000 ($50,000 if married filing separately), or
• The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home.

Example.
You own one home that you bought in 2000. Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens.

To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% x $110,000) - $95,000]; with Bank M.

Your home equity debt is limited to $15,000. This is the smaller of:

• $100,000, the maximum limit, or
• $15,000, the amount that the FMV of $110,000 exceeds the amount of home acquisition debt of $95,000.

Debt higher than limit. Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 - $15,000]; in the preceding example) generally is treated as personal interest and is not deductible. But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible.

Part of home not a qualified home. To figure the limit on your home equity debt, you must divide the FMV of your home between the part that is a qualified home and any part that is not a qualified home. See Divided use of your home under Qualified Home in Part I.

Fair market value (FMV). This is the price at which the home would change hands between you and a buyer, neither having to sell or buy, and both having reasonable knowledge of all relevant facts. Sales of similar homes in your area, on about the same date your last debt was secured by the home, may be helpful in figuring the FMV.

Capital Gains and Losses

Capital Assets
Before we can talk about capital gains and losses, we need to understand a concept in the tax code called a capital asset. Here is an article that helps understand.

What Is A Capital Asset?
Built by J. Steven Tucker on Monday, August 11th, 2008

Most people who have investments such as stock and bonds are aware that stocks and bonds are capital assets and that the sale of stocks and bonds may be subject to the long-term capital gains rates of taxation that are much more advantageous than the tax rates on ordinary income. However, many investors are not aware exactly what constitutes the definition of a capital asset under the IRS rules and that not all capital assets are treated equally.

Actually, the term capital asset has a broad definition. A capital asset is virtually any property with just a couple of exceptions. For example, property held as inventory in a trade or business is not a capital asset. Neither is depreciable property held by a trade or business although depreciable property held by a trade or business may receive capital gains tax treatment under the complicated IRS Code Section 1231 rules.

Basically, all the property that can be considered to be capital assets can be divided into two categories. One category is investment property and the other category is personal use property. These categories are important because of the difference in tax treatment of each one.

Capital assets that are considered investment property include stocks, mutual funds, bonds, land, art, gems, stamps, and coins. A gain on any of these is capital gain. However, for those assets held for a year or less the capital gain is short-term capital gain and is subject to regular or ordinary tax rates. For assets held more than one year, the more favorable long-term capital gains rates apply. A loss on any of these assets is a capital loss. Capital losses can be used to offset other capital gains but only $3,000 of capital losses can be used to offset ordinary income in any one year. Any capital losses that can't be used in any particular year can be carried forward indefinitely to offset future capital gains or ordinary income.

Capital assets that are considered personal use property include personal residences, cars, jewelry, furniture, art, coins, and stamp collections. For those personal use assets that are sold at a gain, the rules discussed above for investment property apply. However, an important distinction for personal use assets is that losses are NOT deductible. That seems unfair since the profits of personal uses assets are taxable, but that's just the way the tax laws are.

2022 Capital Gains Tax Rate Thresholds