The Twelve Days of Tax Savings

You remember the song, The Twelve Days of Christmas. Here at AccountingWEB, we're offering our alternative from a financial perspective, The Twelve Days of Tax Saving. Check back each weekday between December 8 and December 23 for a new and useful pre-year-end tip for cutting your tax dollars.

The Twelve Days of Tax Savings

On the twelfth day of Tax Savings, my accountant recommended to me:
Twelve cherry tartlets
Eleven piles of clothing
Ten gambling losses
Nine useful classes
Eight daycare givers
Seven falling branches
Six prepaid taxes
Five interviews
Four doctor's bills
Three foster kids
Two broken limbs
And a payment of spring tuition.

On the first day of Tax Savings, my accountant recommended to me:

A payment of spring tuition

If you have college students in the family (including yourself), you've probably already received the bill for spring semester tuition. Pay the tuition before January 1 and add the qualifying amount to your eligibility for Hope Credit, Lifetime Learning Credit, college tuition deduction, or a miscellaneous itemized deduction for education expenses.

Read more about these options, including what types of payments qualify for each, in Choosing among tax breaks for college costs.

Caveat: Be sure to compare the amounts you pay with the amount that appears on the 1098-T form you get from the school showing your education payments. If you send a payment at the end of the year, when the school is closed, and the school doesn't receive the payment until January, your payment won't be reflected on the 1098-T form. You are still entitled to claim the full amount of qualifying payments that you made during the calendar year when calculating your education-related tax benefits.

On the second day of Tax Savings, my accountant recommended to me:

Two broken limbs

By combining multiple sources of medical costs in one year, a taxpayer might qualify for the itemized deduction for medical expenses. An itemizing taxpayer is only eligible to claim a deduction for medical costs that exceed 7.5 percent of adjusted gross income. Normal medical care, checkups, preventative examinations, and modest medical costs often will not provide enough expense to qualify the taxpayer for a medical deduction.

And while the timing of many medical costs cannot be controlled, there are situations where you can control when a medical event occurs or when a medical expense is paid. Perhaps you are anticipating a surgical procedure like cataract surgery. There is some flexibility in when a procedure like this can occur. You don't have no cataracts one day and are ready for surgery the next. As the situation progresses and the need for the surgery becomes more imminent, don't forget to consider the timing of the surgery. A December surgery that can be postponed until January might end up landing in a year when you have some other expenses with which to group the cost of the surgery. Dental care is another area where individual have some control over the timing of surgical procedures.

Also, don't forget that you can charge the cost of medical care in one year and pay for it in the next. The choice of the year in which you take the deduction is yours.

Finally, remember that the total amount of medical expenses is not the only consideration. If you know that your income is going to be higher in one year than in the next, try to amass your medical expenses so that the expenses fall in the year with the lower income. With a lower AGI, you'll be able to deduct a larger percent of your medical expense.

On the third day of Tax Savings, my accountant recommended to me:

Three foster kids

A foster child residing in the home for longer than six months can be claimed for the dependency exemption, the EITC, and the CTC. A foster child who resides in the home for six months or less is not eligible for the above tax benefits, however, foster parents may be able to claim a charitable deduction for the care of the foster child who resides with them for a shorter period of time.

When considering the percentage of support you provide for the child, payments you receive for the support of a foster child from a child placement agency are considered support provided by the agency. Similarly, payments you receive for the support of a foster child from a state or county are considered support provided by the state or county.

On the fourth day of Tax Savings, my accountant recommended to me:

Four doctor's bills

Continuing the thinking expressed in the "Two broken limbs" segment of this ditty, if you're thinking bunching medical expenses either at the end of one year or the beginning of the next, don't forget to think about the large variety of expenses you can control. For example, annual check-ups, eye exams, dental cleaning, mammograms - the costs for all of these preventive types of medical examinations can really add up and, when timed properly, might be just what it takes to push you into the realm of deductible medical expenses.

On the fifth day of Tax Savings, my accountant recommended to me:

Five interviews

Don't forget that job search expenses qualify as miscellaneous itemized deductions. You can deduct employment agency fees, cost of producing a resume and other office-related expenses, and travel and transportation expenses relating to a job search.

Miscellaneous itemized deductions are deductible to the extent that they exceed 2% of adjusted gross income. This means that, like medical expenses, miscellaneous deductions should be amassed in one year if at all possible, and if you are deciding between December and January for paying for these expenses, look to the year that will have the lower adjusted gross income because that will be the year when you can take a higher deduction amount.

On the sixth day of Tax Savings, my accountant recommended to me:

Six prepaid taxes

Paying your fourth quarter state estimated tax in December instead of January can result in a higher deduction in the current year. As mentioned before, whenever you have the luxury of making decisions about the timing of income and deductions, be sure to look at the income tax rate you expect to pay for each year and the level of overall income you expect in each year. These factors play a part in choosing in which year to place certain items.

In addition to paying state income taxes in December, think about the other deductible tax payments you have to make and see if there is any flexibility in the timing of payments. If your vehicle license plates are up for renewal in January and you live in a state where property taxes are paid on the vehicle plates, you could renew in December and pay the tax then. Or if you have a real estate property tax payment due near year-end, consider the effectiveness of controlling the timing of that payment as well.

Finally, don't forget your federal income tax. December is a great time to do an assessment of your tax situation for the year. If you anticipate coming up short when you file your federal tax return in the spring, talk to your employer about increasing withholding on your December paychecks.

On the seventh day of Tax Savings, my accountant recommended to me:

Seven falling branches

Don't forget the casualty loss. The IRS definition of a casualty loss is a sudden, unexpected, or unusual event, such as flood, fire, tornado, earth quake, or hurricane. If you itemize your deductions, and you experience a casualty loss or a loss from theft, you are entitled to take a deduction for the amount lost. The rules state that the amount you deduct must exceed $100 per casualty or theft and in addition must exceed 10% of your adjusted gross income.

Note that in 2009, the $100 casualty floor is increased to $500. Also, the rules for casualties as a result of a "net disaster loss" in a Federally declared disaster area waive the AGI limitation for casualties that occurred in 2008 or that occur in 2009.

Note also that the Tax Extenders and AMT Relief Act of 2008 increases an individual's standard deduction by the net disaster loss. This is effective beginning in 2008.

Strange as it may sound, there has never been a better time, from a tax perspective, to endure a casualty.

On the eighth day of Tax Savings, my accountant recommended to me:

Eight daycare givers

Don't just babysit for the fun of it. Bona fide day care providers are entitled to a plethora of tax deductions for the use of their home as a day care.

Caregivers who provide day care in their homes are allowed to deduct a portion of the cost of their home in the form of depreciation or a portion of the rent that they pay, a portion of utilities expenses, the food they provide, advertising, insurance, supplies, toys, bedding, furniture, bookkeeping and billing costs, entertainment, educational materials, and more.

Keep good records and, of course, consult with a tax advisor for more detailed information.

On the ninth day of Tax Savings, my accountant recommended to me:

Nine useful classes

Don't overlook all of the tax benefits available to students. Whether you are enrolled full time, part-time, or just taking a course here and there, look into the options offered by the IRS reducing your taxes.

Credits in the form of the Lifetime Learning Credit and the Hope Credit reduce taxes dollar for dollar. Above-the-line deductions for education expense and interest on student loans can be taken without itemizing.

Itemizers might qualify to deduct education expenses as an miscellaneous itemized deduction.

Self-employed people who pay for work-related education can also take a deduction on their business tax forms.

On the tenth day of Tax Savings, my accountant recommended to me:

Ten gambling losses

With so many casinos and lotteries available, more and more people are taking up the art of gambling. If you are a gambler, of course you already know that you have to report your gambling earnings as income. But did you know that you can take a deduction for your gambling losses? Keep receipts because the IRS won't simply take your word for the amount you claim to have lost, but if you itemize your deductions, you can take a deduction for gambling losses. The amount you deduct cannot exceed the amount of your winnings.

On the eleventh day of Tax Savings, my accountant recommended to me:

Eleven piles of clothing

Why not make room for all the presents you hope to receive and help the needy at the same time? Clean out closets and drawers, attics and basements, and run your piles of unneeded clothing over to your local charity for a last minute tax deduction before the year comes to a close.

Make sure you keep a list of everything you donate, note on the list the quality of the items (donated items must be in good or better condition for the IRS to allow a deduction), and be sure to get a receipt from the charity noting the date of the contribution. If you need help valuing your tax deduction, take a look at the Salvation Army's Donation Valuation Table. You must be able to itemize your deductions to qualify for this tax benefit.

On the twelfth day of Tax Savings, my accountant recommended to me:

Twelve cherry tartlets

Yum! That sounds good! If you're busy baking sweet treats for a charity bake sale, the cost of the ingredients you use and the plating and packaging materials can be treated as a charitable contribution to the organization for which you are baking. In addition, keep track of your mileage back and forth to deliver your goodies, because that counts as a charitable deduction as well. You must be able to itemize your deductions to qualify for this tax benefit.

We at AccountingWEB hope you enjoyed this little taxable melody. Happy holidays to all!

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