2013 “Get $ Fit Challenge”
Each month I will ask our clients, our listeners and our readers to respond to a simple challenge that will help them become more financially fit.
Our “Get $ Fit Challenge” for March is:
What tax saving strategies do you use to reduce your state and federal income tax liability?
Our financial challenge for March is regarding taxes, timely I know! For most of us we are looking for ways to save on taxes. The less we pay Uncle Sam the more we keep that can go toward helping us achieve our personal financial goals. We are asking our readers to share their favorite… but legal, tax savings strategies. What do you use to reduce the amount of tax that you pay each year?
Below are 6 tax tips of that have benefited my clients in the past. These might help you reduce your tax liability as well. These strategies can apply to most families but as always we encourage you to seek the advice of a tax professional. At Preferred Financial Strategies we do not provide tax advice.
- Plan ahead for expensive dental work procedures. Lumping these together in one tax year could get you to the 10% of AGI threshold required to make these a deductible reimbursed medical expense for 2013. This is an increase from 7.5% in 2012. Lumping medical expenses will be more important with the higher threshold. As an example, dental crowns can be rather costly with a big portion not covered by dental insurance. If you and your spouse both anticipate needing crowns, plan ahead. If you could do these in the same year that you are planning on putting a child in braces or this could easily add up to get you over the 10% of AGI needed to make these tax-deductible unreimbursed medical expenses.
- If you are above the income limits and not eligible to fund a Roth consider making non-deductible contributions to a Traditional IRA. These non-deductible contributions may then be converted to a Roth. You will need to check any potential tax impact on the conversion. Having some assets in a Roth IRA may be a good long-term estate planning strategy, especially if you anticipate having more retirement assets than you may need.
- Eligibility limits for qualifying for a Roth IRA are declining gradually. You may not be eligible for the entire $5000 contribution but you may be eligible for less, say $2500.
- Some employers now offer a Roth 401K option. If your employer offers this consider how this might benefit you down the road.
- Are you over 70 1/2 and subject to Required Minimum Distributions (RMDs)? Consider donating your RMDs directly to charity. If you normally make sizable charitable donations and are subject to RMDs or you are subject to RMDs and don’t need the income you can donate them directly to a charity and avoid claiming them as income. Do keep in mind that you lose the charitable deduction of you choose this approach.
- Considering elective surgery such as Lasik or Cosmetic that won’t be covered by insurance? By planning ahead you could fund a Health Savings Account (HSA) with the amount of out-of-pocket expense you expect to be responsible for.
- If you are a high income earner and your employer allows it, you may want to investigate the use of a Deferred Compensation Plan. This allows you to defer compensation to years when you expect to have lower taxable income. This can come in handy when you receive a large bonus or exercise stock options. Keep in mind this is not a retirement plan and most deferred comp plans come with very specific rules about when you have to withdraw the funds.
- Don’t forget to claim that mileage deduction if you are eligible. In years when you elect to take the un-reimbursed medical expense deduction you can also claim mileage to and from the doctor or hospital as part of your expense. You can also claim mileage to and from volunteer activities.
So tell us, what tax savings strategies do you use that might benefit others?
If you have an idea for a “Get $ Fit Challenge” Let us know.
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We want to hear from you!
Stay tuned for April’s “Get $ Fit Challenge”
As you can see many of these strategies require planning ahead. This is where the financial planning process can be a help. Give us a call and let’s make a plan. 704.658.1040