As we approach the end of the year, we should be thinking of income tax planning.
1) Itemizing: Typically, people with a
mortgage can itemize. This is because the standard deduction has risen to approximately
$28,000. For those who do not itemize, consider giving double charity every
other year, a strategy known as “bunching.” In Maryland, it can be very
beneficial to itemize.
2) Medical: Medical expenses must exceed
7.5% of your income before they start to be deductible. Consider a FSA or HSA.
These are medical savings accounts that create a tax deduction.
3) Childcare tax credit: Up to 28% of $6,000
is allowed for preschool and day camps up to age 12, a savings of $1,680. You
need to list the caregiver’s name, address, and ID number.
4) Children: Every child under 17 is worth a tax credit of
$2,000. Age 17 and over are only worth $500. Once a child turns 19, they
typically have to be a student to be claimed.
5) College: Undergraduate college is worth
a tax credit of $2,500. You start to lose this when your income exceeds
$160,000. After four years of college, you get a 20% tax credit. The maximum
benefit is $2,000 per family.
6) 529 Accounts: Originally designed for
college savings, these can now be used for K-12. You get a tax deduction on
your Maryland state return only. There is also the state matching program that
has received a lot of attention. Strongly recommended.
7) 1099s: Collect all your 1099s from banks
and brokerages regarding any income from interest, dividends, and stock sales.
You might want to sell stocks for various tax reasons.
8) 1099-K: Here is a change: If you receive
$600 from PayPal, Amazon, Venmo, etc. you will receive a 1099-K. This could be
for personal items sold at a loss, meaning that you might have to report the
income and take a deduction of equal amount to reflect the cost of the item
sold.
9) Miscellaneous: If you have a business or
a rental property, keep very good records and understand your obligations.
Teachers can deduct up to $300 for classroom supplies.
10) 401k and IRAs: Saving for retirement is
the number one tax deduction. If your employer matches your contribution, you
should certainly participate. Even if not, you still need to save for your old
age. There is also a Roth IRA, which is not tax deductible. I generally prefer
a traditional IRA. Weigh this carefully.
11) Tax credits for electric cars: There are
also tax credits for solar panels and for home improvements that save energy.
Hopefully, with
the right planning, we can minimize taxes.
Eli Pollock, CPA, can be reached at elipollock2@yahoo.com.
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Help Your Child’s
School with a New Charitable Deduction
A new tax law in
2023 enables you to help charities with your IRA funds in the form of a
charitable gift
annuity, a CGA. Here is how it works:
You give a gift to
a charity, such as a day school. You receive an immediate income tax charitable
deduction. In exchange, you get an income-tax-free payout each year for the
rest of your life. After your passing, the charity receives what remains in the
fund.
The maximum you
can put into this fund is $50,000 total lifetime limit. Husband and wife can
each put in $50,000. Your annual payout is based on your age and seems to be about
six percent. So, say you set aside $50,000 for Talmudical Academy, you would
receive about $3,000 each year. The amount the charity will receive after your
passing depends on how successfully the money is invested and how long you
live. No one can predict those.
Here are my
thoughts on these annuities.Certainly, giving charity is a great thing to do.
Clearly, it is best to give charity in a way that saves taxes as well. Here are
some pointers:
1) Do you want the
charity to get the money now? These annuities will give money to the charity only
after the passing of the donor.
2) Alternatively, you
can withdraw the funds, pay the tax, donate the money, and get a tax deduction.
Timed correctly, this can be an effective strategy. Timed poorly, it will push
you into a higher tax bracket.
3) Important: If
children inherit an IRA or a 401k, they must generally withdraw the money
within 10 years – and pay taxes on these withdrawals. One must therefore carefully
weigh what tax bracket the children are in.
Let’s say the
parent has five children and one million dollars in a 401k. Each child will
receive $200,000 – or $20,000 per year for 10 years. Here is the problem: If
the child is on any government handout programs – Medicaid, for example – they may
become ineligible if the inheritance pushes the child’s income over the limit. Then
they will owe taxes and lose their
Medicaid benefit.
Better think this
through carefully. It might make more sense for the parent to withdraw the
money in his lifetime and gift the post-tax money to the child. This annuity
option could play an important role in a tax savings strategy, but it needs to
be weighed step by step.
Again, I am in
favor of charitable giving, and this annuity might make sense. It will remove $50,000
($100,000 for a couple) from the income column and still provide an income
stream to the parent. This could be an excellent option.
