A new year is a fresh slate in many ways, including the way you manage your taxes. There are numerous tax deductions and tax credits available to taxpayers who know about them and use them. The problem is that many taxpayers either don’t pay attention to them or don’t prepare to use them. Most of these deductions and credits require that you track expenses and keep receipts. These are easy things to do if you create a strategy and system for tracking expenses. Make a goal in 2016 to take advantage of tax deductions and tax credits. You may be able to lower your overall taxes by doing so.
The following tax deductions and tax credits are often overlooked. See if you qualify for any of them. By making a plan now for the coming year, you may be able to take advantage of more tax deductions and credits.
Long Term Care Insurance Premiums
You may be able to deduct premiums paid for qualified Long Term Care (LTC) insurance policies from you 2016 taxes. Some LTC policies qualify as “medical expenses” according to the IRS itemization definition. Talk with your tax adviser about the possibility of deducting these expenses; in many cases you can deduct them to the extent that your total medical expenses exceed 10% of your adjusted gross income.
Advisory Deductions
Investment management fees charged to taxable accounts are tax deductible in many cases. The fees can be listed on Schedule A in the section titled “Job Expenses and Certain Miscellaneous Deductions.” Other fees that can be included are tax preparation fees, safe deposit box fees, and other expenses. In order to qualify for a deduction, your miscellaneous deductions must total to more than 2% of your adjusted gross income (AGI). People who didn’t exceed that threshold while they were working might want to recalculate once they retire.1
Home Office Deductions
According to Forbes, an estimated 26 million Americans have home offices, and yet, just over 3 million American taxpayers claim home-office deductions.2 Perhaps people have been nervous about triggering IRS audits, but there are clear guidelines about what constitutes a home office. If you qualify, go ahead and use the deduction.
To claim a home office deduction, your office should be used exclusively and on a regular basis. In other words, it should be a space that is only used for work and that you use regularly (although that doesn’t have to mean daily). You can deduct two kinds of expenses: direct and indirect. Direct expenses include costs specifically associated with your office such as hiring help to remodel the room, office supplies, or a cell phone used for your business. Indirect expenses include items like property insurance, utility bills, and your home alarm system. These items can add up to a healthy deduction for your 2016 taxes.
Business Deductions
The IRS defines business expenses as “the cost of carrying on a trade or business.” When your business makes a profit, you can deduct business expenses.3 The IRS qualification for a business expense is that it is both ordinary and necessary, and business expenses are divided into three categories: expenses used to figure the cost of goods sold, capital expenses, and personal expenses.
Many small business owners are simply unaware of some of the business deductions they can take on their taxes. Of course, you’ll need to speak with a tax professional about your situation, but check to see if you qualify for these following often-overlooked business deductions:
- Car Expenses. The IRS standard mileage rate for 2015 was 57.5 cents per mile for business miles driven. Additionally, you can deduct expenses for car washes, tire changes, and even satellite radio fees.4
- Startup Costs. Business owners often incur costs in the startup phase of their businesses before they begin tracking income and expenses, but these startup costs may be tax deductible. For instance, you can deduct expenses from continuing education courses, lunches with future clients, and even previously purchased equipment like computers that now help your business to function. The trick is to have adequate records (receipts or invoices) for the items you claim as startup costs.
- Employee Costs. When you reimburse your employees for their business-related expenses (gas meals, hotel accommodations, transportation, etc.), you can deduct these reimbursements from your taxes. Again, as with other business deductions, it’s imperative that you keep excellent records of these expenses.5
American Opportunity Tax Credit
The American Opportunity Tax Credit made the Hope Credit available to a broader range of taxpayers. This tax credit assists parents and students in paying for college expenses. If you, your spouse, or your children are attending college, check with your financial or tax advisor to see if you qualify for this tax credit. Many of those who qualify are eligible for an annual credit of up to $2,500 per student.
Lifetime Learning Credit
The Lifetime Learning Credit is a separate tax credit from the American Opportunity Tax Credit.6There is no limit to the number of years taxpayers can claim the Lifetime Learning Credit, and it can be claimed for expenses such as tuition, fees, supplies, and books. The courses must be part of a postsecondary degree program or taken by students to improve job skills.
Earned Income Credit
The Earned Income Credit is a benefit for working people, generally with low to moderate income.6 The 2016 Earned Income Credit is slightly more generous than the credit for 2015, so if you qualify for this tax credit, be sure to claim it.
With a little strategic tax planning, you can start off 2016 with your own personal financial goals in mind. To speak with a Wealth Manager about your personal situation, please contact us at Wrap Manager. Call 1-800-541-7774 or contact us here to talk about your personal financial outlook in the coming year and for years to come.
Sources:
1. Forbes
2. Forbes
3. IRS.gov
4. SHRM
5. Entrepreneur
6. IRS.gov
The information presented by WrapManager, Inc. is general information only and does not represent tax or legal advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance. WrapManager, Inc. does not advise on any income tax requirements or issues.
