Nov. 19, 2006 - Tax Advice to Maximize Deductions, Minimize Pain for Seniors
Earlier this year I received my Seniors designation. One of the most important issues facing seniors is wealth preservation and planning optimal tax strategies. It's getting close to that time of year again so I thought I'd write about tax issues facing seniors and how to maximize tax deductions while minimizing the old IRS pain. It's not to early during the holiday season to remember the taxman-Mr. IRS-and make plans to minimize your tax hit when April 15th rolls around. A few smart moves before the end of the year could save you a bundle in the spring. Qualifying for many tax benefits depends on individual circumstances, so it's always wise to consult a CPA/qualified tax preparer. Here are some isues to ponder while you're preparing your 2006 taxes:
1. Early mortgage and property tax payments
Pay your January, 2007 mortgage in December, 2006 and the mortgage intereste for that Juanuary payment can be deducted on your 2006 taxes. Check with you local government to see if it's possible to pre-pay property taxes and claim that deduction on your 2006 tax return.
2. Energy-efficient renovations
If you've modified your home with energy efficient products, such as solar panels, windows, and geothermal heat pumps, you may be eligible for a tax credit. The maximum credit is $500. Be aware that the rule has a few wrinkles. For instance, only $200 of that $500 can be taken for windows.
3. Investment property
Tally up the receipts associated with your investment proeprty. Repairs-things to keep in the property in good working condition-are deductible during the year you pay them. More significant investments, such as a kitchen or bathroom or a major renovation, get depreciated over 27.5 years for residentail real estate. Major improvements on non-residential investment properties are depreciated over 31.5 years.
4. Points and refinancing mortgages
If you paid points when you refinanced a home mortgage, points are deductible in full in the year paid, if the proceeds of the loan were used to improve your residence. If they were used for something else (new car, vacation, etc.) they're deductible, but only over the life of the loan. If this is a second refinance, and the taxpayer was amortizing previous points over the life of the loan, the remaining points not previously deducted are allowed in full, but only if the new loan is with a different lender.
5. 1031 Exchanges
Profits on the sale of rental property are treated as a capital gain and you'll have to settle up with Uncle Sam. One option to defer paying that tax is to re-invest the proceeds in a like-kind exchange. To the extent that the proceeds are reinvested, the gain is deferred until the replacement property is sold.
6. Vacation Property
Carefully track how much time you spent at a vacation property. When you own and rent out vacation home, expenses are generally allocated between rental use and personal used, based on the number of days of each use. If you use the home for 14 days or less, or less than 10% of the time it is available for rent, the expenses are all allocated to, and deducted rom the rental income. If you meet this limited-use test, the vacation home is not considered used as a personal residence. Use by family members is counted as personal use by the owner, unliess family memebers pay fair market rent.
7. Tax-free gifts
If you're looking to reduce your taxable estate for hiers, one option is to gift money to children, grandchildren and others. Individuals can gift up to $12,000 (or $24,000 per couple) per year to anyone without tax consequences. Another option is to gift appreciated assets, such as a piece of real estate worth $12,000. "If I give a piece of real estate, it could be worth $15,000 in a few years and $30,000 down the road. It's a way to legally give more than that $12,000 per year to someone.
8. Parental dependant care
If you're supporting a parent and provide over half of his or her support, such as nursing home and medical expenses, you may be able to claim him or her as a dependent. Rules are stringent, so check with your CPA to determine whether your parent meets the dependency requirements.
9. Charitable donactions
Those 701/2 or older can designate up to $100,000 of their IRA directly to a charity. It's a neat tool for Seniors who might have a lot of montey and are worried about estate tax issues. It's a great way to give to their charity of choice and save some estate tax down the road for their heirs.
10. Tax advisors
Find a good tax advisor and tax retun preparer. Get recommendations for referrals from trusted friends, bankers and attorneys. Seek out someone with expertise in estate planning and Senior issues, so the person can offer long-term tax strategies versues just focusing on annual tax preperation.
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