WANT TO CUT YOUR tax bill for this year and next? The main thing is to act—or not act—before Dec. 31, while there’s still time to take advantage of tax angles that can generate dramatic savings.
Once we’re beyond Dec. 31, it’s generally too late to do anything but file Form 1040 on the basis of what took place the preceding year. There are a few exceptions. For instance, early in the year, you can still make deductible contributions to some tax-deferred retirement accounts,
SAY “1040” AND MOST of us think of the income tax returns we file each year on April 15. But it’s only because of chance that we fill out 1040s, instead of 1039s or 1041s: That number was up next in the sequential numbering of forms developed by the Bureau of Internal Revenue, the predecessor of today’s IRS.
It all began on Jan. 5, 1914, when the Department of the Treasury unveiled the new Form 1040 for tax year 1913.
IRS AUDITS ARE usually uneventful. Auditors ask taxpayers to produce receipts, canceled checks and similar documentation to verify deductions and other facts and figures. When taxpayers come up with the required substantiation, examiners move on to other audits. In fact, the feds frequently close cases without exacting extra taxes—and sometimes they even authorize refunds.
But things aren’t always so friendly.
Be concerned when an IRS investigator walks in unannounced at your home or office and asks to see your records.
WHAT’S YOUR FAVORITE tax rate? This isn’t meant to be a trick question. If you’re like most people, your favorite rate is probably zero.
While a 0% tax rate is great, it isn’t easy to achieve. There’s just a handful of ways to create tax-free income. If you have young children, 529 accounts are a great option. If you earn a high income, you might buy tax-exempt municipal bonds.
And, of course, there are Roth IRAs.
MY 10-YEAR-OLD SON and I had a chance encounter last month with the commissioner of the Boston Police Department. After saying hello, he bent down and offered my son this advice: “Stay in school,” he said, “and listen to your parents.”
Often, the recipe for childhood success is just that simple. Ditto when it comes to managing money. The basic principles are usually pretty straightforward. But there’s one topic that often leaves people with a headache.
OWNING A HOME IS getting more expensive, thanks to the Tax Cuts and Jobs Act (TCJA) enacted in December 2017. The new law is the most comprehensive overhaul of the Internal Revenue Code since the Tax Reform Act of 1986. The legislation includes provisions that curtail long-cherished write-offs for mortgage interest and property taxes.
It also abolishes deductions for casualty and theft losses claimed by individuals whose homes, household goods and other property suffer damage due to events like burglaries,
SOME OF MY CLIENTS incur hefty medical expenses for themselves and family members. I tell them not to expect too much help from the IRS when it comes to deducting such expenses—unless the costs are well into five figures.
To deduct medical costs, taxpayers have to forego the standard deduction and instead itemize on Schedule A of Form 1040. Their expenses also have to be for bills that aren’t covered by insurance or reimbursed by employers.
THESE BEING THE TIMES they are, I frequently field queries from clients who are asked for loans by relatives or friends. These would-be borrowers plead their inability to come up with the down payments for homes or who want to launch “can’t fail” business ventures. Suppose, as so often happens, the loans go sour and the borrowers’ last messages mention their entry into witness protection programs.
I remind wannabe lenders who intend to stake friends or relatives to familiarize themselves beforehand with long-standing tax rules.
I HAVE A CLIENT I’ll call Irene. She became a widow in April when husband Henry died.
Like most married couples, they held title to their home in joint ownership with the right of survivorship. In plainer language, this means that co-owner Henry’s death results in his loss of all ownership in their dwelling. Surviving co-owner Irene automatically acquires all ownership in it.
Irene is uncertain what to do with her highly appreciated home.
RAISE YOUR WALLET if you think taxes won’t be going up.
Is there much doubt that the federal government will seek additional revenue, given its ballooning debt and future spending on Social Security, Medicare and other federal programs? If so, should retirement savers really be deferring taxes—or, instead, should we be taking advantage of tax-free retirement savings?
The IRA was first introduced in 1974. At that time, there was a 38% tax rate on individual incomes of more than $20,000,
THE TAX LAW RELIEVES most Social Security recipients of income taxes on their monthly checks. But it requires middle- and upper-income households to count up to 85% of their benefits as reportable income. Sound punishing? It can be especially punishing for couples who are cutting the knot—but they may live happily ever after.
Taxes on Social Security benefits are triggered when recipients’ MAGI exceeds specified amounts. MAGI is an acronym for modified adjusted gross income (and not the term for the three wise men who bore gifts to the infant Jesus).
I OFTEN RECEIVE letters and emails from retired individuals in need of financial advice. Many of their queries mention that they attended one of those ubiquitous free lunch seminars offered by investment advisors and estate planners.
While I could ask what enticed them to attend, I’ve already heard the answer lots of times. They fell for the seminar promoters’ promises of free gourmet meals, along with tips on how to earn excellent returns on their investments,
I REGULARLY REMIND clients to hold onto their tax records in case their returns are questioned by the Internal Revenue Service. Understandably, clients ask just how long do they need to save those old records that clutter their closets and desk drawers?
Unfortunately, there’s no flat cutoff. The IRS says the answer depends on what information the records contain and the kind of transaction involved.
It supplements this vague guideline with a cryptic warning: Keep supporting records for “as long as they are important for the federal tax law.”
WHEN I CHAT WITH clients about the IRS and mention audits, many turn white with fright. To alleviate angst, I explain that years of underfunding have forced an understaffed IRS to significantly scale back its enforcement efforts. But my reassurances are insufficient to assuage the fears of some clients, so I alert them to tactics that can make audits less traumatic and expensive.
Let’s start with the bad news: Audits are basically adversarial proceedings.
“IN THIS WORLD,” Ben Franklin famously once wrote, “nothing can be said to be certain, except death and taxes.” But I would also argue that neither is completely out of our hands.
When it comes to our health, we all know that we should exercise, eat right and go for regular checkups. And when it comes to our tax bill, there’s quite a bit we can do to minimize it, especially in retirement. Below,