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Tax Savings for Older Families

Time claiming Social Security benefits, keep careful records of necessary improvements to your home or car, and tote up out-of-pocket costs of doing good.

Updated January 2014

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Older families should make these moves throughout the year to keep their bill low at tax time. Here are the areas where you should look for savings:

Tax Savings For: Work | Car and Home | Charitable Contributions | Estate Planning | Inheritance | Investments and Retirement Savings | Medical Expenses | Rental Property

Work

Give yourself a raise.

If you got a big tax refund this year, it meant that you're having too much tax taken out of your paycheck every payday. Filing a new W-4 form with your employer (talk to your payroll office) will insure that you get more of your money when you earn it. If you're just average, you deserve about $225 a month extra. Try our easy withholding calculator now to see if you deserve more allowances.

Go for a health tax break.

Be aggressive if your employer offers a medical reimbursement account — sometimes called a flex plan. These plans let you divert part of your salary to an account which you can then tap to pay medical bills. The advantage? You avoid both income and Social Security tax on the money, and that can save you 20% to 35% or more compared with spending after-tax money. The maximum you can contribute to a health care flex plan is $2,500.

Don't be afraid of home-office rules.

If you use part of your home regularly and exclusively for your business, you can qualify to deduct as home-office expenses some costs that are otherwise considered personal expenses, including part of your utility bills, insurance premiums and home maintenance costs. Some home-business operators steer away from these breaks for fear of an audit. But a new IRS rule makes it easier to claim this tax break. Instead of calculating individual expenses, you can claim a standard deduction of $5 for every square foot of office space, up to 300 square feet.

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Time receipt of self-employment income.

Those who run their own businesses have a lot of flexibility at year-end. To push the receipt of income into the following year , delay mailing bills to clients until late in December that payment is received after December 31. Or, pay business expenses before January 1 to lock in deductions.

Pay back a 401(k) loan before leaving the job.

Failing to do so means the loan amount will be considered a distribution that will be taxed in your top bracket and, if you’re younger than 55 in the year you leave your job, hit with a 10% penalty, too.

Home

Convert a vacation home to your principal residence.

Until 2009, there was a sweet tax break for folks who sold their homes, claimed tax-free profit and then moved into a vacation property. After they lived in that home for two years, they could sell and claim tax-free profit again, including appreciation from the days the place was a vacation home. There can still be some real tax benefits to this strategy, but the value has fallen. A portion of any profit on the sale of a vacation-home-turned-principal-residence will not qualify as tax-free home-sale profit. The taxable portion will be based on the ratio of the time after 2008 the property was used as a vacation home to the total period of ownership.

Use an installment sale of real estate to defer a tax bill.

If the buyer pays you in installments, the IRS will let you pay the tax bill on your profit in installments, too. You must charge interest on the deal, and each payment you receive will have three parts: interest (taxable at your top rate), capital gain (taxed at a maximum of 15%) and return of your investment (tax-free).

Charitable Donations

Tote up out-of-pocket costs of doing good.

Keep track of what you spend while doing charitable work, from what you spend on stamps for a fundraiser, to the cost of ingredients for casseroles you make for the homeless, to the number of miles you drive your car for charity (worth 14 cents a mile). Add such costs with your cash contributions when figuring your charitable contribution deduction.

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Tax Savings for Older Families

Time claiming Social Security benefits, keep careful records of necessary improvements to your home or car, and tote up out-of-pocket costs of doing good.

Updated January 2014

Estate Planning

Protect your heirs.

Be sure beneficiary designations for your IRAs and 401(k)s are up to date. If your IRA or 401(k) goes to your estate rather an a designated beneficiary, unfavorable withdrawal rules could cost your heirs dearly.

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.

Roll over an inherited 401(K).

A recent change in the rules allows a beneficiary of a 401(k) plan to roll over the account into an IRA and stretch payouts (and the tax bill on them) over his or her lifetime. This can be a tremendous advantage over the old rules that generally required such accounts be cashed out, and all taxes paid, within five years. To qualify for this break, you must name a person or persons (not your estate) as your beneficiary. If your 401(k) goes through your estate, the old five-year rule applies.

Investment and Retirement Planning

Check the calendar before you sell.

You must own an investment for more than one year for profit to qualify as a long-term gain and enjoy preferential tax rates. The "holding period" starts on the day after you buy a stock, mutual fund or other asset and ends on the day you sell it.

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Don't buy a tax bill.

Before you invest in a mutual fund near the end of the year, check to see when the fund will distribute dividends. On that day, the value of shares will fall by the amount paid. Buy just before the payout and the dividend will effectively rebate part of your purchase price, but you'll owe tax on the amount. Buy after the payout, and you'll get a lower price, and no tax bill.

Keep a running tally of your basis.

For assets you buy, your "tax basis" is basically how much you have invested. It's the amount from which gain or loss is figured when you sell. If you use dividends to purchase additional shares, each purchase adds to your basis. If a stock splits or you receive a return-of-capital distribution, your basis changes. Only by carefully tracking your basis can you protect yourself from overpaying taxes on your profits when you sell. A new IRS rule requires financial services and brokerage firms to report to the IRS the cost basis for stocks purchased on or after January 1, 2011 and mutual funds purchased on or after January 2, 2012. They'll also provide you with this information, which should make it easier for you to avoid costly mistakes when you sell. For older shares, though, you'll still need to track your basis to avoid overpaying taxes on your profits.

Mine your portfolio for tax savings.

Investors have significant control over their tax liability. As you near the end of the year, tote up gains and losses on sales to date and review your portfolio for paper gains and losses. If you have a net loss so far, you have an opportunity to take some profit tax free. Alternatively, a net profit on previous sales can be offset by realizing losses on sales before the end of the year.

Beware of Uncle Sam's interest in your divorce.

Watch the tax basis — that is, the value from which gains or losses will be determined when property is sold — when working toward an equitable property settlement. One $100,000 asset might be worth a lot more — or a lot less — than another, after the IRS gets its share. Remember: Alimony is deductible by the payer and taxable income to the recipient; a property settlement is neither deductible nor taxable.

Time claiming Social Security benefits.

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. Try Kiplinger's Social Security Solutions to find out your optimal solution.

Dodge a 50% tax penalty.

Taxpayers over age 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.

Medical Expenses

Keep careful records 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.

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.

Rental Property

Stay actively involved in rental real estate.

Generally, anti-tax-shelter legislation prevents losses from real estate investments from being deducted against other kinds of income. But, if you are actively involved in a rental activity, you can deduct up to $25,000 of such losses, if your adjusted gross income is less than $100,000. You don't have to mow grass and unclog toilets to qualify as actively involved; but you should make sure you're involved in setting rents and approving tenants and management firms.

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