5 Simple Tax Strategies

Needing a few simple key takeaways for taxes this year? Have a quick read at 5 things you might not know that could help your tax situation in the near future.

If you're in touch with your tax person often and have a good relationship with them, you might already know these things. However, if you normally do your taxes at home on your own without any professional help, then these few tips may help you with your tax situation and self- preparation.

Strategy #1 - 401k withdrawals or 401k loan

In short, the IRS has allowed extended privileges regarding retirement plans due to the unfortunate events we are experiencing with COVID19. The 401k withdrawal is allowable up to $100k and is penalty free. You have the option of paying the taxes on the withdrawal in the year of disbursement or splitting it up over the next 3 tax years. It is definitely taxable income per usual, unless you have decided to maximize the benefits of the 401k loan and paid it all back when due. Here is link a to a Q & A on the IRS website that has very helpful information from commonly asked questions.  Strategy #2 - 529 Education plans vrs. Coverdell

Regarding the Coverdell and the 529 plans. Here are some quick differences between the two. The Coverdell is great in that you can use it for K-12th expenses as well as higher education expenses. The contributions are limited to $2,000 per year for each beneficiary. At the time the funds are distributed, they must be used for educational purposes, or the withdrawals will then become taxable. As far as the 529, the contributions are limited to $10,000 per year but contributions should not exceed the total expected cost for the tuition. As with the Coverdell, the 529 distributions are not taxable if withdrawn for qualified educational purposes. Strategy #3 - Depreciation for rental properties

One of the most common missed expenses for rental properties is depreciation. I've seen dozens of people lose out of the benefit of depreciation due to filing their own taxes. My best advice is if you have a rental property included with your taxes, please hire a tax professional. There have only been a handful of people who filed their own taxes which involved a rental property where they actually knew to claim depreciation. The concept of depreciation is simple - expensing the cost of an item over an allowable period of time. Application of the concept is what many people can't comprehend. The worst part about not claiming depreciation is that whether you do or do not claim it is in the end once you sell the item, depreciation still needs to be accounted for during the time owned and used for business related purposes.

Strategy #4 - Charitable contributions - non-cash

Countless times I have sat with clients and heard them say that they have never been able to deduct more than $500 of non cash contributions on their taxes. This is not true ... However there is extra work involved for the person preparing the return if the amount contributed is in excess of $500. If you're doing your own return and you donated $2,400 of items to Goodwill, take a look at form 8283 to go the extra mile and save yourself a few hundred dollars extra on a simple write off.

Strategy #5 - Health insurance deduction for self employed

I had to throw something in there just for the self employed individuals to ensure everyone could take something from this blog. Some people know that as a self employed individual, you can write of the cost of your health insurance premiums as a deductible expense. What you might not have thought of is that if you're self employed and collecting social security, the medicare premiums you pay are deductible. The same goes for individuals who are paying their health insurance through Covered California - not only are the premiums deductible, but if you had to pay a tax through your tax return for underpayment of premiums that amount would also be deductible as a health insurance premium.

Hopefully you benefited from at least one of these strategies, or know someone who could use this information in their situation. See below for one extra tip not related to the topics above. *Tip regarding Inheritances: If you have experienced the unfortunate event of a beloved one passing during the year, and they left you some of their belongings, please note a few quick tips. The primary question I'm asked by individuals who inherit assets is - is this taxable and how is it calculated. One important thing to remember is cash inheritances are not taxable. The second thing to remember is if you inherited property, the basis of that property is usually the fair market value of the property on the date of the decedent's death. Also, if you inherit an IRA or Roth IRA, please note that 10 year distribution rule does apply for the IRA's - this is something new that was put into place with the Secure Act at the end of 2019. The good news is you can take the money out of the traditional IRA anytime during the 10 year period, and to my understanding - in any increment. The Roth IRA usually must be distributed by the end of the fifth calendar year after the year of the owner's death. For more information, please use this link.