Tax Planning for Individuals


Timing your itemized deductions is a proper way to control your taxes. The first step is to review your previous year tax return. To see if you will be able to itemize your deductions. Obtain a copy of IRS Form 1040, Schedule A to estimate the deductions. Determine if accelerating deductions will work for you. The other important consideration is the alternative minimum tax (AMT). State and local taxes and miscellaneous itemized deductions are not used in calculating the AMT.

Some of the easiest deductions to accelerate are property tax and state income tax. For example, your property tax bill arrived in October, but is due January 31. Pay it before year end to claim the deduction this year.

Medical expenses often provide an opportunity for tax reduction. As these expenses are limited to the amount over 10 percent of your adjusted gross income (AGI), proper timing is important. Elective surgery, contact lenses or eyeglasses, hearing aids and physical exams are expenses you can control. Do not forget to take medical mileage.

Investment interest expense, limited to investment income, and home mortgage interest are other areas to consider. Writing a check on December 31, to cover next Januarys mortgage payment allows you to deduct this pre-paid interest.

Many types of interest are not deductible such as interest on car loans, credit cards and a personal credit line. You may wish to analyze your loans and restructure the non-deductible interest into deductible home equity loan. Deductible interest on home equity loans is limited to $1,000,000 of principal. You should consider the effect of turning unsecured debt into a loan secured by your home.

Miscellaneous itemized deductions are subject to a 2 percent limitation of your AGI. Some items that may be deductible include work tools, auto use for your job, safe deposit box, tax preparation, investment fees and work related expenses. The key to accelerating the deductions is exceeding the 2 percent floor.

Donating an appreciated asset to a charity generally will produce a better tax saving than selling it. Total deductions are limited by your income, but you may carry an excess donation forward for five years.

When you reach age 701/2, you must take a minimum distribution from your IRA or other qualified retirement program. The distribution must start by April 1, following the year you reach 70 1/2, or you may face a 50 percent excise tax on any shortfall.

Review your estimated tax payment to avoid underpayment penalties. Your final payment is due January 15. Consider making any catch-up amounts through extra withholding on your W-2.

If you employ any domestic workers, you may be required to withhold and pay Social Security taxes annually. Increase your estimated tax payments or withholding on your W-2 to cover the additional tax. Quarterly filing is required in a number of states.

Review credits, such as the child tax credit and education credit, because of the phase-out based on your AGI. Additional care is required if you are subject to the AMT.