Over the last three years, thousands of pages of tax code have been written – or, should I say, rewritten. The bulk of new tax code came from the Tax Cuts and Jobs Act (TCJA) in 2017, the Secure Act in 2019, and the Cares Act in 2020. With so many changes, it’s understandable that easy deductions and tax reduction strategies are often missed.
As a financial planner, one of my duties is to work with our tax team to ensure clients take advantage of every available tax deduction and credit that is appropriate for their situation. To pinpoint every available opportunity within the tax code, we compiled the Lighthouse Tax Reduction Checklist. This is a list of 46 tax deductions and strategies that we use to identify potential tax savings for clients. This month, we’re highlighting seven of them.
1. Private Mortgage Insurance (PMI)
Deducting PMI was eliminated in 2017, but brought back by legislation and signed into law on December 20, 2019. This not only makes the deduction available again for eligible homeowners for 2020 and future tax years, but also enables taxpayers to take it retroactively for the 2018 and 2019 tax years by filing amended returns. You can amend federal returns within three years of the date of the original return or up to two years after you paid the tax owed, whichever is later.
2. Required Minimum Distribution (RMD)
The Secure Act pushes back the age at which distributions from retirement accounts (401k/403b/IRA) need to begin. In recent history, the age to start RMDs was 70½. Starting in 2020, the age to start RMDs is 72. Keep in mind that the penalty for not taking an RMD is a hefty 50% of what you are required to take.
3. Back Door Roth
This strategy allows high income earners to contribute to a non-deductible IRA and immediately convert it into a Roth IRA to allow for tax-free growth. In order to contribute directly to a Roth IRA, a single filer must have Modified Adjusted Gross Income (MAGI) of no more than $139,000 and a married individual (filing joint) must have MAGI of no more than $206,000.
4. Charitable Giving
The Cares Act of 2020 now allows those who file using the standard deduction to also deduct up to $300 for charitable contribution. Normally those who do not itemize do not get to deduct charitable gifts.
5. Qualified Dividends (QD)
Qualified Dividends are dividends paid by companies (such as stock dividends) and stock mutual funds. They are taxed at capital gains rate rather than income tax rates.
If you are in the 15% or lower tax bracket, you pay 0% tax on qualified dividends.
If your tax bracket is above 15% but below the top 39.6% tax bracket, you pay 15% on qualified dividends.
If you are in the top 39.6% tax bracket, you pay 20% on qualified dividends.
In contrast, dividends from savings accounts, CDs and bonds are taxed at the higher income tax rates.
6. The Augusta Rule (Section 280A)
As a golfer, this is one of my favorites. In the mid-70s, spurred on by those from Georgia where the masters Golf tournament is played, homeowners lobbied and successfully got this legislation passed. This rule allows you to rent your home (that isn’t a full-time rental) for up to 14 days without having to claim the income! And it doesn’t have to be consecutive rentals.
7. The Augusta Rule Business Strategy
In addition to renting to individual people, you can also rent your home to your business to claim the same tax benefit. To do this, you need to show how your home is being used for business purposes – such as for meetings or events – and document everything, including who attended and what was discussed. You also need to demonstrate that the rent you charge is reasonable, which is why you should get rate quotes from hotels, locally rented homes, and other similar venues.
Again, these are only a few of the items we look for to minimize taxes for our clients. And less tax means you keep more of your hard-earned money. Reach out if you’d like a review of your personal tax situation. You can call us at 301-865-9740 or email us at firstname.lastname@example.org.