I had a client email me the other day trying to figure out how to minimize their tax obligation…or “involuntary philanthropy,” as I sometimes think of it.
Now, full disclosure. I am not a tax accountant or a CPA. I have a masters with a tax specialization but do not sign any returns and instead work with smart tax advisors to create an A-Team. We want to help our mutual clients save their hard-earned money to support their vision for America (and beyond) rather than merely sending it to Uncle Sam. (And, they don’t even send a thank you card or box of See’s chocolates!)
And, for the sake of my outside compliance attorneys, please always consult a tax professional or your CPA for information about your specific situation before implementing anything we share below.
So…with all that as a preface, here are some often missed tax deductions that may save you some money this April and beyond.
In addition, for some of us in America, the IRS has postponed the date of filing business and personal taxes until October 16, 2023 because of major flooding and other weather damage. Bear in mind this is for only certain states and counties, as shown on the IRS or FEMA websites. (Click here for more details, and here for California.)
This year, the Federal & certain state governments are telling us we can actually wait on sending in our taxes…“Imagine That™!”
Commonly Overlooked Personal Tax Deductions
So, let’s start on the personal side of the ledger with some of my favorites!
These deductions apply whether you own your business, work for a company, or are happily enjoying your retirement (at least most of them will work, even if retired and under a certain age.)
Health Savings Account (HSA) Contributions. Okay, so what I said just now about taking advantage of these while enjoying your retirement? You would have needed to retire early for this one because you can only set up an HSA before age 65.
Do you have one? If not, you should! This is one I classify as a “no-brainer,” but it is shocking to me how many individuals/couples are not taking advantage of it.
It’s a perfect “trifecta”… you deduct the money put into the HSA, it grows tax-free and comes out tax-free so long as it’s used for healthcare expenses. Wow! What’s not to love?
In addition, it is the only tax deduction I know of that you can set up in the current year and retroactively apply to reduce your previous year’s tax return personally. (Mind you, there are some retirement plan deductions you can still take in the current tax year and have it count for the prior year – but outside of that, this is the only one I know of. And of this size.)
In 2022, you can contribute up to $3,650 if single ($3,850 in 2023) or $7,300 for families ($7,750 in 2023). Plus, you can add another $1,000 catch-up contribution if you’re 55 or older. Again, it’s tax-deductible now – no tax on the earnings – no tax when it’s withdrawn to reimburse for medical, dental, and optical expenses.
Why am I telling you about last year? If you haven’t sent in your taxes yet, you can still make contributions for last year up until tax day!
Caution: You can only set up an HSA if you have a “high-deductible health insurance plan.” That said, in 2023, this only requires a $1,500 minimum annual healthcare deductible or a $3,000 deductible for a family. That’s just about every plan today, isn’t it? If you can set up a Health Savings Account, you’re a step ahead on your tax optimization for the future.
Reimburse yourself in the future for healthcare expenses while minimizing your taxes today. I like it! And, in this year especially, if your county is on the IRS “nice list,” you have until October 16, 2023, to take the deduction and have it count as a deduction in 2022!
Child & Dependent Care Tax Credit. Most people make sure to check off the box for the tax deductions they get for having children. But did you also know that you can get some tax deductions for taking care of aging parents too?
If you paid someone to take care of a child under age 13 – or an ailing parent living with you if you claim them as a dependent on your tax return – you can get a tax credit of up to 35% or $3,000. If you have two or more children, that credit jumps to $6,000!
Understand that a tax credit is far more powerful than a tax deduction. The credit reduces the actual tax calculated dollar-for-dollar! A $6,000 tax credit applies to directly reduce taxes you would otherwise be paying up to $6,000 in this example. Boom!
Medical Costs Above 7.5% MAGI. Some medical expenses are unavoidable, even if you’re using your HSA to pay for them. Luckily, you can also deduct any medical expense above 7.5% of your Modified Adjusted Gross Income (MAGI). If you want to take this deduction to the next level and know you have a big out-of-pocket medical expense coming up, schedule everything in one tax year if you have any choice in the matter!
Charitable Contributions at Mach 7. We personally use what I like to call a “Family Giving Fund” (aka Donor Advised Fund) to make a large contribution to offset taxes in a year… and then tap into that account over a number of years to make charitable contributions when and as we wish. If you know that you will have a lot of taxes due in a year, open an account by 12/31 and fund it. In most cases, 100% of your contribution will be deductible even though the various charities you wish to give to have not been identified.
Oh, by the way, you can also deduct your out-of-pocket expenses too. Most people know that you can deduct your charitable contributions. The butter, eggs, sugar, flour, and cinnamon for your world-famous Snickerdoodles can all be counted as a charitable contribution…assuming they’re going to charity and not your family cookie jar. Just be sure to save the receipt. As well, miles driven for charitable purposes can be deductible, too.
Mortgage Refinancing Points. If you refinanced your mortgage last year before interest rates started climbing, good planning! You also get to deduct the points on the new loan over the term of the new mortgage.
For example, if you refinanced to get your home paid off in 15 years, you can deduct 1/15th of the points per year.
You can also deduct the remaining points in a lump sum if you sell your home before paying it off.
Reinvested Dividends. You caught me! Technically, this isn’t a deduction, but who doesn’t want to minimize capital gains taxes? Automatically reinvesting your dividends from equities increases your “cost basis.” Since your basis doesn’t count toward capital gains tax, those reinvestments over time can really reduce the amount of taxable capital gains when you sell your shares.
Eco-Friendly Home Improvement. Make sure you take the Energy Efficient Home Improvement Credit if you made any home improvements last year that count as environmentally or energy friendly. Depending on what it was and whether you made the improvement last year (and there’s more this year), you can get up to 30% of the cost of installation in some cases.
- Solar panels
- Wind turbines
- Solar door & windows
- Battery storage
- Geothermal heat pumps
For more tables of what counts and how much, head over to the list on the Department of Energy’s website.
SALT Deductions. If you have your own business (other than a C Corporation), ask your accountant to pass the SALT!
SALT stands for State and Local Tax. In years gone by, you could deduct the full amount of taxes paid to your state and local governments for:
- Property tax
- Car purchases
- Boat purchases
- Local and state income tax, or state sales tax
In 2017, changes were made to the tax rules. It limited the amount of state and local tax payments that could be used to offset an individual’s taxable income for Federal income tax calculations. You can presently only deduct a maximum of $10,000 of taxes paid to your respective state government against your income for the calculation of Federal taxes. This was a big blow to people living in high-taxed states like California, New York, New Jersey, Illinois, etc.
However, some states have now developed a strategy that allows owners of pass-through business entities (e.g., sole proprietorship, partnership, limited liability company, or sub-chapter S corporation) to pay an amount that will often exceed the $10,000 cap. This higher amount of state taxes paid can then be deducted against Federal taxes. Thus, this allows those taxpayers to deduct more than they would have achieved personally. (This is especially true for individual tax-payers that do not itemize their returns…which is a large number of individuals!)
Remember, talk with your tax people, but we have been doing this ourselves since it first became available as a tax strategy a few years ago.
Business Tax Deductions
Now that we’ve hit some of my favorite personal tax deductions, let’s get down to business!
Backdating Retirement Plan Contributions. It’s not too late to set up a Profit-Sharing Plan or a Defined Benefit Pension Plan for yourself (and certain employees have to be included as well) for the 2022 tax year. There are ways to benefit the highly compensated, older employees who are most often the business owners themselves.
Just have a 401(k)? You’re missing out on potentially hundreds of thousands of dollars in deductions which can frequently end up in your own account(s).
Your Home Office. It’s a tricky one. Working from home via a W2 does not count for this deduction. The IRS requires you to run your own business from a room in your home to qualify here. But this isn’t just limited to the square footage of the room, it also includes:
- Property taxes
- Home insurance
- Power, water, internet, & other utilities
- Repairs & maintenance
As an extra bonus, it also eliminates personal commuting miles if you have an outside office. The mileage between your home office and your regular office now becomes fully deductible.
If you have insomnia and want to know all the fine print, here are the complete IRS guidelines for having your home office.
Bad Debt. Don’t you love it when your clients “will definitely pay” at some point in the future? Or have you loaned an employee some money and have yet to see it returned? The IRS counts that as “bad debt,” which qualifies as a deduction if the uncollectible debt was previously included in your gross income. Thanks, IRS.
Health Insurance. It turns out that being self-employed means you have to buy your own health insurance. This can actually be a great opportunity to get a high-deductible health plan to take advantage of the extra tax advantages of a Health Savings Account. Plus, you can deduct the cost of your (and your family’s) health insurance from your taxes.
Marketing Dollars. Here’s a good one. Marketing is expensive, whether you’re paying someone to run your marketing, your Google Adsense, or growing your email marketing list. You’ll want to talk to your accountant about the finer details of this one, but many of these costs are deductible such as:
- Web development
- Email marketing
- Printing costs
- Hiring consultants
Your Best Tax Year Ever
The tax code is stuffed full of deductions and strategies that you can use to minimize what we like to think of as “involuntary philanthropy” so you can make a difference in the charitable causes that matter to you.
These are just a few of the more commonly missed tax deductions I’ve seen. There are several other high-powered tax deductions that we can discuss over the phone if you would like to.
Remember…run these ideas by your CPA or other experienced tax professional! The tax code is thousands of pages, and they’ll understand your unique situation best…“Imagine That™!”
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R. J. Kelly, Wealth Legacy Group®, Inc. – March 2023
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