How to Beat the IRS Like a Billionaire
President-elect Donald Trump never did release his latest tax returns during the campaign, but older returns leaked to the press revealed his ability to pay as little as possible to the IRS.
Why should billionaires have all the fun?
As the year draws to a close and you start to pull together your tax documents, now’s the time to make sure your tax reduction strategy is as strong as possible. Below, I provide you with 10 perfectly legal but commonly ignored tax deductions and credits.
Taxes make it harder for you to reach your financial goals, because they steadily chip away at your income and investment earnings. To build up your net worth, you must minimize the taxes you pay.
Of course, you should follow the letter of the law, but you shouldn’t overpay the IRS, either. Don’t let the deductions you deserve slip through the cracks. It’s hard to believe that while many folks love to complain about taxes, those same people may be failing to take advantage of the many legal deductions available to them. Come tax time, don’t leave money on the table!
I recently spoke with the tax experts on our staff, who told me that the following tax deductions are the most frequently overlooked by Americans:
1) Reinvested dividends
If you’re set up to have mutual fund dividends automatically plowed into buying more shares, don’t forget that each reinvestment boosts your tax basis in the fund. That, in turn, lowers the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Neglecting to factor reinvested dividends into your basis results in double taxation of the dividends, once in the year when they were paid to you and reinvested and afterwards when they’re included in the sales proceeds.
2) Job seeking costs
The unemployment rate in the U.S. is now at a relatively low 4.9%, about half what it was in the immediate wake of the Great Recession of 2008. However, that headline figure masks “underemployment.” If you’re still looking for work, you can deduct several aspects of any job hunt, including transportation expenses, food and lodging, employment agency fees, costs of printing a resume, etc.
3) Deduction of Medicare expenses for the self-employed
The rise of home-based businesses is a huge but underrated trend that’s transforming the U.S. economy. Many factors are fueling this megatrend, including the flexibility of the Internet, the emergence of new technological tools, the non-conformism of millennials, and the corporate downsizing of Baby Boomers who aren’t ready to go out to pasture. This is the new face of retirement in America.
It all adds up to a big paradigm shift. People who run their own businesses after qualifying for Medicare can deduct the premiums they pay for Medicare Part B and Medicare Part D, in addition to the expense of supplemental Medicare policies or the cost of a Medicare Advantage plan.
4) Child-care credit
You can qualify for a tax credit worth between 20% and 35% of what you pay for childcare while you work. A “credit” is considerably more beneficial than a deduction, because it lowers your tax bill dollar for dollar. Ignoring this credit, which millions of two-income families can use, is even worse than missing a deduction that simply lowers the amount of income that’s subject to tax.
5) Refinancing points
When you purchase a house, you can deduct the points paid to obtain your mortgage. When you refinance, you must deduct the points on the new loan over the life of the loan. Consequently, you can deduct 1/30th of the points a year if it’s a 30-year mortgage.
6) Airline baggage fees
Yep, you read right: this is your chance for revenge against airlines that are socking you with ever-rising fees. If you’re self-employed and traveling on business, add those darned fees to your deductible travel expenses.
7) Legal fees paid to obtain alimony
If you’re a romantic, you won’t like reading this statistic: Nearly one in every two marriages ends in divorce. Because alimony is taxable income, you can deduct the portion of the lawyer’s fee that is attributable to designating the amount. You can also deduct the portion of the fee that is attributable to tax advice.
8) State sales and income taxes
Many filers neglect to include state sales and income taxes paid as deductions. If you live in a state without an income tax, adding up all the tax you’ve paid on personal and household items can save you a lot of money.
9) Home remodeling
As underscored by the rising fortunes of home improvement giant Home Depot (NYSE: HD), the housing rebound is fueling a remodeling boom. If you remodeled your existing home, be sure to deduct the state sales tax for building materials if you’re itemizing.
10) Military travel
If you belong to the National Guard or are a military reservist, portions of your travel expenses for attending meetings or drills more than 100 miles from home and overnight stays are deductible. You’re doing your duty for Uncle Sam; this is your chance to get something back.
Got any questions about taxes or investments? Send me a letter: email@example.com — John Persinos
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