Thursday, April 18, 2013

Start planning now to lower your taxes for the year

There are times when the only way to lower your tax liability is to have more taxes withheld from your paycheck or retirement. As children leave the home, your tax liability begins to increase. After a child turns 17, and it doesn’t matter what time of the year this happens, you no longer qualify for the Child Tax Credit of $1,000.
This affects the amount of taxes you will owe. Once the children leave the home or turn 19 and are not full-time students or they work, if they make more than the exemption amount ($3,900 for 2013), they cannot be claimed on the parent’s tax return. This can greatly affect the amount of taxes you will owe.
These are events that need to be planned for during the year. I have seen many incidences of this happening this tax season. Taxpayers are unprepared for their tax bill because they did not make adjustments to the withholdings from their paychecks. Even if your children still live with you and you support them, if they are 19 and not full-time students, the income factor comes into play. The child may not even need to file a tax return, but that does not mean you can claim the child on your return if the child earned more than the exemption amount.
Another area that causes your tax liability to increase is if your deductions fall below the standard deduction rate. Deductions taken on Schedule A such as medical bills (more than 10 percent of your Adjusted Gross Income for 2013), state taxes withheld or paid during the year, property taxes, mortgage interest and charitable donations must add up to more than the standard deductions. For 2013, they are $12,200 for married filing jointly, $8,950 for head of household; $6,100 for individual taxpayers; and $6,100 for married taxpayers filing separate.
If you add up the amounts for medical and your income is $50,000, these medical bills must be more than $5,000 to even begin to get a deduction for them. If they are under this amount, you do not need to track your expenses. However, let’s say for example you make $50,000 and your medical bills were $5,500. You medical deduction is $500. It is not $5,500. The first $5,000 does not count; only amounts over this will be deductible.
Let’s take another example. You are a single taxpayer and give $2,000 to your local church. Your other deductions such as medical, state taxes withheld, property taxes and mortgage interest all must add up to more than $6,100 to get the deduction for your donation to your church. If you are a renter, had little taken out of your paycheck or retirement for state withholdings, the standard deduction of $6,100 will more likely be the better option.
Another way to reduce your tax liability is to lower your taxable income by contributing to your employer’s 401k or other retirement plan. This lowers the amount of taxable income and keeps your money with you instead of having more withheld from your paycheck for taxes. Talk with a financial adviser to take advantage of this option to lower your taxable income.
Planning throughout the year for life-changing events can help lower your tax liability.