Commonly overlooked tax savingsFinances
Tax season is upon us, but before you file, take the time to be sure that you're not paying more than you owe. Melinda Kibler, CFP, EA, and portfolio manager of Palisades Hudson Financial Group, explains how keeping these three factors in mind can help you save.
You already know that you can deduct donations of money or goods, but according to Kibler, most taxpayers often don't deduct enough. That's because many of us fail to keep detailed records tracking our donations throughout the year. "Whether you dropped off a bag of clothing at a local charity or donated $5 at the register of your grocery store, you should be tracking all of these contributions to ensure that you get the highest tax benefit," says Kibler. If you didn't track this last year, sit down now and do your best to account for as much as possible. And don't forget, you can also include transportation costs in service to a charitable organization (like dropping off those donations or getting to and from a charity event or volunteer day). Then pay closer attention to donations this year.
"Reinvested dividends in a taxable investment account are treated as current income, the same as though you received them in cash," says Kibler. Qualified dividends, which are those held for a specific time, are taxed at a lower capital-gains tax rate (visit irs.gov to find out what qualifies a dividend). This isn't exactly a deduction, but you can cut down on your tax bill through good record keeping. When reinvesting dividends, add this amount to your basis in the security. "By tracking the basis, you can reduce your capital-gains tax if you sell the security at a higher price," says Kibler.
You can deduct the fees paid to your investment manager, in excess of 2 percent of your adjusted gross income (for example, if you make $80,000 a year, you can deduct fees over $1,600). However, you must subtract any investment management fees related to tax-exempt income, advises Kibler. If you have a portfolio of mixed assets, she adds, this is typically done on a prorated basis. If you have only investment management fees related to your retirement accounts, Kibler recommends that your manager not debit your account for their fees but instead that you write a check to the manager from your bank account. "This allows the retirement asset to continue to grow uninterrupted and allows the taxpayer a deduction—a double benefit," she says.
Any information regarding taxation contained herein is based on our understanding of current tax law. The tax and legislative information may be subject to change and different interpretations. We recommend that you seek professional legal advice for applicability to your personal situation.