Who among us wants to pay the IRS more taxes than we have to? While few may raise their hands, Americans regularly overpay because they fail to take tax deductions for which they are eligible.
Let's take a quick look at the five most overlooked opportunities to manage your tax bill.
1. Reinvested Dividends
When a mutual fund pays you a dividend or capital gains distribution, that income is a taxable event (unless the fund is held in a tax-deferred account, like an IRA). If you're like most fund owners, you reinvest these payments in additional shares of the fund. The tax trap lurks when you sell your mutual fund. If you fail to add the reinvested amounts back into the investment's cost basis, it can result in double taxation of those dividends.
Mutual funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
2. Out-of-Pocket Charity
Keep a written record of cash donations including the date, the organization and the amount given. It's not just cash donations that are deductible. If you donate goods or use your personal car for charitable work, these are potential tax deductions. Keep records of the mileage traveled and dates you volunteered. Just be sure to get a receipt for any amount over $250.
3. State & Property Taxes
Did you owe state taxes when you filed last year's tax returns? Or, did you pay property taxes? If you did, don't forget to include these payments as a deduction on your current year's tax return. There is currently a $10,000 cap on the state and local tax deduction.3
4. Medicare Premiums
If you are self-employed (and not covered by an employer plan or your spouse's plan), you may be eligible to deduct premiums paid for Medicare Parts B and D, Medigap insurance, and Medicare Advantage Plan. This deduction is available regardless of whether you itemize deductions or not.
5. Income in Respect of a Decedent (IRD)
If you've inherited an IRA, you may be able to deduct estate tax paid by the IRA owner from the taxes due on the withdrawals you take from the inherited account. The purpose of the IRD deduction is to avoid a “double” taxation effect, by providing that beneficiaries who inherited an IRA will receive an income tax deduction for any additional estate taxes that were caused by that pre-tax asset.
The IRD deduction is claimed by the beneficiary of the IRA, at the time that distributions occur from the IRA (this ensures that the deduction applies at the same time that the IRA becomes taxable in the first place).
Don’t Forget Investment Losses
2022 was a tough year for stocks and bonds. You may have taken losses in your investment accounts. Check with your financial advisor or accountant to see if you can offset gains you may have taken with losses. In addition, you may be able to write off up to $3,000 of losses above gains taken. There are specific rules regarding gains and losses that you should review, or check with your accountant. Unused losses may be carried forward to future years.
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Final thought.
Check with your financial advisor and your accountant if you need help identifying overlooked tax deductions. Many CPAs provide a questionnaire to help you recall overlooked items. Your financial advisor or CPA can review your investments and tax return to help identify missed opportunities.
Are you comfortable with your progress towards retirement? How about helping future generations meet their financial goals? If you have more than $2 million saved and need help from a wealth manager, the Peak Wealth Planning team can assist.
Peak Wealth Planning specializes in helping high-net worth individuals and families plan for the future.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning offers personalized concierge services to meet your wealth management needs, including financial planning, investment management, ESOP diversification, retirement income, insurance, and estate planning. As a fee-based financial advisor based in Chicago, Peak Wealth Planning serves a select group of clients in Illinois and across other states.