Posted by: Jennifer Foley Posted date: January 17, 2014
As you get ready to file your 2013 tax return, take a quick look at the list that follows. It’s a summary of little-known tax strategies that may save you money when you file your tax return. It pays to take a look. You may wind up owing Uncle Sam less than you thought, or get a bigger refund than you expected, even if only one of these strategies applies to you.
Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2013? That may help you years down the road when you take tax-free payouts from the account (if you’re eligible), but the contribution isn’t deductible. If you realize you need the deduction that a contribution to a regular IRA yields, you can change your mind and turn that Roth IRA contribution into a traditional IRA contribution. If either you or your spouse is covered by an employer provided retirement plan, then the deduction starts to phase out when AGI exceeds certain limits, depending on filing status (for example, for 2013, the phaseout for joint filers starts at $95,000 of AGI).
Make a deductible IRA contribution, even if you don’t work. As a general rule, you can’t make a deductible IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner while you manage the home front. For 2013, you can make a deductible IRA contribution of up to $5,500 ($6,500 if you are 50 or over) even if you have no earned income. What’s more, even if your spouse is covered by an employer-provided retirement plan, you can still make a fully deductible IRA contribution as long as your joint AGI as specially computed doesn’t exceed $178,000. To be deductible for the 2013 tax year, the IRA contribution must be made no later than your tax return due date.
It may pay for you not to claim a dependency deduction for a child in college. This can work to your family’s benefit if you pay college tuition for your child, your income is too high for you to claim education credits (i.e., the American Opportunity tax credit (AOTC)/modified Hope credit and the Lifetime Learning credit), and your child has enough taxable income to make use of most or all of the credit. If you forego the dependency deduction, your child can claim the education credits on his or her return for expenses paid by the child, even though the education expenses were paid out of gifts, loans, or personal savings, including savings from a qualified tuition program (also referred to as a 529 plan).
Decide between an education credit and the higher education deduction. If you paid college expenses in 2013, you may be able to choose between taking an education credit (AOTC or Lifetime Learning credit) or the deduction for higher education expenses. For 2014, the AOTC is phased out ratably for taxpayers with modified adjusted gross income (AGI) of $80,000 to $90,000 ($160,000 to $180,000 for joint returns), and the Lifetime Learning credit is phased out ratably for taxpayers with modified AGI of $54,000 to $64,000 ($108,000 to $128,000 for joint returns).
Home improvements may be medical expense deductions. Home improvements generally aren’t deductible. But a medical expense deduction may be claimed if you make a medically necessary home improvement, such as a lift or elevator for a handicapped person, or a therapy spa for an arthritis sufferer. The cost of such an expense is deductible as a medical expense to the extent it exceeds any resulting increase in value of the property. For example, if a qualifying improvement costing $5,000 increases the value of your home by $2,000, the medical expense is $3,000. Note, however, that medical expenses for 2013 can be claimed on Schedule A, Form 1040 only to the extent they exceed 10% of your AGI (7.5% if you or your spouse has reached age 65 at the end of the tax year.
If you would like any additional information, contact Karen Welch, CPA at Walsh & Company, PC; firstname.lastname@example.org or 248-644-5233