ON THE MONEY: Becoming tax savvy

Greg Roberts for the Aiken Standard writes: The latest estimate that I saw stated that 75 percent of Americans get a tax refund each year, and, translated, that means that too many of us are giving the federal government a tax-free loan out of our money. The average federal tax refund is in the neighborhood of $3,000, which means that most of us are having too much withheld from our paychecks. There is a very good withholding calculator at www.kiplinger.com/tools. You can use this online tool to adjust your exemptions so that you can take home more of your own money each paycheck.

One very good reason to adjust your withholding is that far too many of us spend our tax refunds on non-essential items and wind up frittering the money away. If instead, we had more take home pay, that additional income could be spent on “regular” expenses, or better still, used to pay down debt.

If you work out of your home, don’t think that claiming the cost of an office in your home will necessarily trigger IRS scrutiny. So long as your home office expenses are legitimate, you should include every possible expense to reduce your taxable income. That includes depreciation of your home, including as an expense a prorata share of the cost of your utilities, including Internet access fees. And don’t forget the business portion of your cell phone charges.

The amount of your deductions for the business use of your vehicle depends on the manner in which you receive your income. If you receive a W-2, you may deduct the unreimbursed portion of your mileage expenses at the rate of 55.5 cents per mile (for 2012) offset by the amount of any employer reimbursement. Remember that the total dollar amount of the expense must exceed 2 percent of your adjusted gross income to be included as an itemized expense. Yes, you could use your actual vehicle expenses, including depreciation, but keeping accurate records can be a hassle, so most persons take the mileage route.

If you are self-employed, your business mileage expense (or the actual expenses of operating your vehicle for business) is deductible without the 2 percent of AGI threshold. The self-employed can also deduct 100 percent of any long-term care insurance premiums, regardless of age. Then, too, if you have substantial income and are self-employed or are the sole owner of a pass through entity, consider installing a defined benefit pension plan, particularly if you are over 50. The deductible cost of a defined benefit plan can far exceed the amount that you can contribute to a profit sharing plan or other defined contribution plan. If you have no employees, the entire contribution would benefit you.

Be wary of using your home equity credit line if your income will catapult you into paying Alternative Minimum Tax. Generally, interest on up to $100,000 of debt secured by your home can be deducted, however you choose to use the money. But if you pay AMT, you must use the Home Equity loan proceeds to improve your home to quality for a tax deduction.

Remember to get receipts for all of your non-cash charitable contributions, and keep track of all your philanthropic expenditures, including mileage, which is deductible at the rate of 14 cents per mile. If you believe that your non-cash charitable contribution is worth more than $500, you will need to document the method you used to value your contribution, so it will pay you to be accurate.

If you are going to make a cash contribution to a charity, take a look at giving away shares of appreciated stock rather than cash. If you have owned the stock for at least one year, you get to deduct the market value of the stock (which would equate to cash) plus you never have to pay any tax on the profit.

If you have a traditional IRA, be sure that your beneficiary designations are current. If you are leaving your IRA to your children or grandchildren, check to ensure that you have named each beneficiary by name and not by class, such as “all my living children, equally.” The reason for this precision is that by being specific, your named beneficiaries will be able to withdraw their monies each year over their life expectancies, which is a huge benefit. In the absence of a specific beneficiary designation, their only option will be to withdraw the monies over the five years after your death.

If you are going to buy shares in a mutual fund this year, be sure to find out when the fund distributes dividends. On that date, the value of the shares will drop by the amount of the dividend. But if you buy just before the payout date, the dividend will effectively rebate part of your purchase price, but you’ll owe tax on the amount. Buy after the payout, and you’ll get a lower price and no tax bill.