Major life events usually bring changes to all aspects of people’s lives—including their taxes.
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Events like launching a business, marriage, divorce, or home buying all have major financial implications, and could change people’s taxable income situation.
But smaller changes could bring changes to a tax situation, pushing someone who always filed the standard deduction into the realm of itemized deductions for greater tax savings.
Here’s what you need to review as the year progresses to prepare for the next tax season.
Medical Expenses. Prior to 2013, you were allowed to deduct medical expenses in excess of 7.5% of your adjusted gross income. So if you made $100,000, you would only be able to deduct medical payments that exceed the limit of $7,500. Beginning in 2013, unless you are older than 65, the exemption goes up to $10,000. That’s a big difference so if possible, stack medical expenses into one year. For example, if you are having expensive medical work done this year and you also need a root canal, get them both done.
You are allowed to deduct the amounts you pay for health insurance, long-term care insurance (limits apply), prescriptions, naturopathic doctors, chiropractor, therapeutic massage, hearing aids, the list goes on.
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According to the IRS, “Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body.” But remember, this is the tax code so there are plenty of exceptions, caveats, as well as surprises as to what will be allowed. So check with a tax professional or consult IRS Publication 502, which thoroughly details the topic.
Deductions Subject to the 2% Ceiling. On Schedule A, Itemized Deductions, you may list various miscellaneous deductions such as, tax preparation fees (which, by the way, include audit representation, tax planning fees, purchase of tax preparation software, etc.), employee business expenses, union dues, job search expenses, among others.
Check out List of Miscellaneous Itemized Deductions at the IRS website to make sure you take every eligible deduction. Like medical, these write offs are limited, and you may only deduct amounts that exceed 2% of your adjusted gross income. Therefore, it is wise to also try to stack these into one taxable year in order to maximize the opportunity.
Payments by Credit Card. Good news on this front. You are allowed to deduct any payments made toward deductible expenses via credit card whether you have paid the credit card bill or not. As long as the charges are incurred during the taxable year. So perhaps on Dec. 31, you pay for a root canal on your Master Card but don’t pay that bill until January. No matter: You are allowed to deduct the dental work for the 2013 tax year.
Property Taxes and State Income Taxes. You are allowed to deduct additional payments made on these expenses during the calendar year. So, if for example, you last estimated state income tax payment is due on Jan. 15, 2014 (for the 2013 year), and you make it on that date, you cannot take it as a deduction for 2013 because it was not paid during 2013. So make the payment by the end of December 2013 instead.
All that said, some of the items listed above are considered “preference items” for the alternative minimum tax and prepaying may not be helpful in some situations as it will trigger this additional tax. It is wise to consult a tax pro.
IRA Contributions. A lot of people wait until April 15 to make an IRA contribution for the prior year, but it’s a good idea to calculate the tax impact. Sometimes your income may shake out too low to make it a worthwhile deduction for the prior year. It may be beneficial to assign the contribution to the current tax year. So check it out.
In any event, here’s another timing tip when it comes to IRAs: make monthly contributions instead of one year end contribution. Not only is it more easily affordable but you can play the highs and lows of the market more to your advantage.