Commonly overlooked tax savingsFinances
Tax season is upon us, but before you file, take the time to help make sure you’re not paying more than you owe. If you’re among the Americans who typically only take the standard IRS deductions instead of itemizing on your 1040, you may be missing out on some money-saving tax deductions or credits that you’re eligible for. Keep these three factors in mind that may help you save.
You already know that you can deduct donations of money or goods, but according to Melinda Kibler, CFP, EA and portfolio manager of Palisades Hudson Financial Group, 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 in an interview conducted by Athene. 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 may be able to 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 as a dividend). This isn't exactly a deduction, but you may be able to 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," states Kibler.
Earned income tax credit
The Earned Income Tax Credit (EITC), designed to supplement wages for low-to-moderate income workers, may or may not be on your radar. Although tens of millions of people previously classified as “middle class” — including traditional white-collar workers — now fall into the “low income” bracket because they lost a job, took a pay cut, or worked fewer hours during the year.
Given the interruptions and changes in employment affecting millions of workers from the widespread efforts to help control the pandemic, it may be worth talking to your tax advisor to see if you’re eligible this year.
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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.