Brian Wynne, CPA

For many people, there is nothing as dreadful as dealing with income taxes each year. When you first sit down with all the forms and receipts, you may feel overwhelmed; our goal is to simplify the process while keeping you in compliance with the tax codes so you can preserve, grow & protect your assets.

A lot has changed for 2013 – there are a number of new taxes and tax increases. If you are just sitting down to review your forms and filing your taxes has you scratching your head this year, here are 6 important strategies that will help you make the most of your tax situation:

1. Have You Made the Best Use of Deductions? When working with clients, one of our priorities is to make sure that you take full advantage of the tax code. Often, higher-income taxpayers see many of their deductions watered down (called phase-outs). To mitigate phase-outs, look to see if those same deductions can benefit other areas of your tax return.

For instance, fees you pay to an accountant are deductible as a miscellaneous itemized deduction, but only to the extent that all of your miscellaneous itemized deductions are greater than 2% of your income. However, if you are subject to alternative minimum tax, that deduction in its entirety is disallowed, and there are also other phase-outs based on your income.

Here is where the allocation comes in – if you own a business, part of your tax preparation costs are related to preparing the part of your tax return related to that business, so you can allocate those fees to the business, where they are deductible in full as a business expense.

With recent expirations and increasing tax rates, this strategy is an important tool for your tax preparations and can help minimize your tax obligations.

2. Is Your Cost Basis Correct? Cost basis is the tax term for the cost of your assets – primarily stocks, mutual funds, etc. In most basic scenarios, this is the purchase price of a security. However, many securities pay dividends that are reinvested (used to buy more shares).

In this case, your cost basis must incorporate the original purchase price of the security, plus the price paid for each additional reinvestment. Starting in 2011, the IRS required brokers to report this to taxpayers on their 1099s, but only for securities purchased after a certain date.

You pay capital gains tax on the difference between the sales price of a security and its cost basis. Reporting that cost basis accurately ensures that you are paying the correct amount of tax – and nothing more. It is important to check your broker’s tax statements to make sure there are no errors or missing information, which could increase the capital gain reported to the IRS and, therefore, your taxes paid.

3. Did You Refinance Your Home? If you refinanced during the year, be sure to review the settlement sheet you received at closing for additional deductions. In some cases, property taxes are settled up at refinancing, and those can be deducted on your tax return.

In other cases, points were paid, which may be deductible over the life of the loan. There may also be mortgage interest paid in advance of your first mortgage payment, which may not always be reported by the bank.

4. Do You Have Receipts for Charitable Deductions? The IRS has increasingly focused on charitable contributions in the last few years. Specifically, they have cracked down on requiring taxpayers to have written support for most donations, usually in the form of a letter from a charity acknowledging the contribution and asserting their tax-exempt status.

Ensure that you have letters for any donation of $250 or more. Donations less than $250 still require written support, but a cancelled check or bank statement is sufficient. Be sure to exclude the value of any goods or services received in exchange for the donation from the amount you claim on your return. For example, if you attend a charity dinner at the cost of $500 per ticket, but the dinner is valued at $50, the deduction is $450 per ticket.

5. What Did You Do with Last Year’s State Tax Refund? Since state taxes that you pay are deductible for federal tax purposes, any refunds of state taxes may be taxable to you in the subsequent year.

However, there are many situations where you may not have benefited from the deduction for state taxes. In this case, the associated refund is not taxable to you. This is called the ‘tax-benefit rule,’ and could happen because you didn’t itemize your deductions, you were subject to the alternative minimum tax in the prior year, or you had too little taxable income in the prior year. You’ll usually receive a Form 1099-G from the state advising you of your refund, but it may not always be taxable.

6. Have You Reported Foreign Assets?
Over the past several years, the Treasury has embarked on what can only be characterized as a full-on assault on US taxpayers with assets or other business interests outside the US. If you have a foreign bank account, own a home or other assets overseas, own stock of a foreign corporation or an interest in a foreign partnership, or are involved with a foreign trust, please talk to your CPA, who will evaluate any necessary reporting.

The penalties for not reporting these assets or interests can be up to 50% of the value of the asset, and in some cases can result in criminal charges.

Bonus Tax Planning Strategy: IRA Contributions
One of the very few available opportunities for tax planning during filing season is contributing to an IRA. This could be a traditional IRA contribution or a Roth IRA contribution (available until April 15th), or, if you own a business, an SEP IRA contribution (available until October 15th if you extend your tax return due-date).

There is even a loophole in the tax code right now that may enable you to contribute to a Roth IRA even though your income is beyond the regular limit to make contributions. This only works in certain situations, but could be a great tool to build up a Roth IRA, which provides no current tax benefit, but grows tax free.

When approached thoughtfully and with detail, taxes don’t have to be a source of stress. We would be happy to talk to you about any of the tax strategies above and/or answer questions about your specific tax situation. You can reach out to me at [email protected] or 301.272.6019.

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