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Every year is an election year when it comes to making
decisions on your annual income tax return. Here are four common examples
that can create tax savings opportunities if you elect the correct option.
1. Tax filing status. Typically, filing a joint tax return
instead of filing separately is beneficial to a married couple, but not
always! For instance, if one spouse has a high amount of medical expenses
and the other doesn’t, your total medical deduction may be greater by filing
separately due to the 7.5% of adjusted gross income (AGI) threshold before
you can deduct these expenses.
2. Higher education expenses. Many parents of
college students face a decision: Whether to take one of the two credits
for higher education expenses or the tuition and fees deduction. To
complicate matters, the credits and the deduction are all phased out based
on different modified adjusted gross income (AGI) levels. Before you elect
which tax benefit makes the most sense, you will need to evaluate all
options.
3. Investment interest. Investment interest expenses can be
deducted up to the amount of net investment income for the year. This
income does not usually include capital gains, because of favorable tax
treatment of this type of gain. However, you can elect to include capital
gains to help you deduct your interest expense. You can even cherry-pick
which capital gains to use for this deduction. If you take this election,
you could forego the favorable tax rate for long-term gains.
4. Installment sales. If you sell real estate or other assets
in installments over two or more years, the tax liability is spread over
the years that payments are received. Thus, you may be able to postpone the
tax due. This technique can reduce the total tax paid depending on your
effective tax rate each year. However, you can also elect out of
installment sale treatment by paying the entire tax in the year of the
sale. You may wish to take this election if your income is lower in the
year of the sale.
Thankfully
there is help navigating these key tax elections. Simply call with any
questions.
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