Every tax season well-paid executives, senior managers and business owners incorrectly claim or miss a variety of tax deductions. As a result, they pay too much money in taxes, often costing hundreds, even thousands of dollars.
Before you file your federal and state tax returns, here are several recommendations to help you take advantage of some important tax deductions that are often overlooked.
For starters, no matter your situation, consider contributing to an Individual Retirement Account. Here are some options for individuals and business owners:
— Single-income couples should consider opening an IRA account for the non-working person and gain an additional deduction. For example, the working spouse who earns $100,000 should contribute as much as possible through their 401(k) plan at work. But if the other spouse has no income, that person can open an IRA and any contributions will not only lower their 2015 tax bill, but provide an additional source of retirement income.
— Small business owners who don’t have access to an employer’s 401(k) plan can open or add to an existing IRA account until the April 18 filing deadline. The maximum annual contribution is $5,500 per person, or $6,500 for people 50 and older. Self-employed people should also consider opening a Simplified Retirement Pension (SEP), which is similar to an IRA. Business owners can contribute up to 25 percent of their net income, up to $53,000, and pay no taxes on these contributions until they withdraw the funds during retirement.
Next, be sure to examine these categories for extra savings:
— If you made a major purchase in 2015, explore the benefits of deducting sales taxes. The law allows anyone to deduct the larger of the amount paid in either state income tax or sales tax. If you live in Georgia and bought a new car, truck or boat in 2015, the amount of sales taxes for all purchases may be larger than the deduction for state income taxes.
— Don’t forget to deduct 2014 state income taxes paid in 2015. One of the most overlooked deductions is the state tax that was paid with the previous year’s return. If you had to write a check to the Georgia Department of Revenue last year, be sure to take the deduction on this year’s return.
— Deduct even small charitable contributions. Many people have out-of-pocket expenses to their favorite charities. These expenses range from the cost of non-perishable items, such as clothing given to a local shelter, as well as the 14 cents per mile deduction for every mile driven while volunteering for a charity. Just remember you need a receipt for any expense of more than $250.
— If you are 65 and older and self-employed, you are likely paying Medicare premiums. Unless covered by an employer health plan, or your spouse’s employer’s plan, most people can maximize this deduction by claiming it on page one, line 29 of the federal income tax form. Don’t make the mistake of lumping this expense into the itemized medical expenses on Schedule A, where you won’t receive any benefit unless all medical expenses exceed 7.5 percent of your adjusted gross income.
— Finally, if you own a vacation home or rental property, report all expenses during the year – such as the cost of repairs and maintenance – on Schedule E. Even if income limitations make you ineligible for a tax deduction in 2015, these deductions can help reduce any capital gains when you sell the property. For example, if you purchase a vacation home for $250,000 and sell it for the same amount 10 years later, all of these previous losses are tax deductible and will likely create a substantial tax savings.
Nathan Corbitt is a wealth advisor for Brightworth, an Atlanta-based wealth management firm with $1.2 billion of assets under management.
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