CPAs work with the tax code day in and day out and see a lot of items that provide the opportunity to save tax. Many of these items are used by CPAs to prepare their own returns and if you have ever wanted to take a peek under the hood of your CPA’s tax return, here is your chance. Reducing your tax liability requires a year round effort to plan and keep good records. Following are a few of the top tax saving strategies used by CPA’s:
Health savings account
Health savings accounts (“HSA’s”) are available to taxpayers who are enrolled in a high deductible health plan. In effect, the health savings account works in tandem with your health insurance plan but provides a separate savings component. Annual amounts established by the IRS can be contributed to the health savings account with an “above the line” tax deduction being available for the contribution. The health savings account deduction looks much like the traditional IRA deduction on the front page of your income tax return. However, there is a key difference – contributions to a traditional IRA are tied up until you reach age 59 ½ or they are subject to a 10% penalty and federal and state income taxes. Contributions to a health savings account can be withdrawn without penalty or tax as long as they are used for “qualified medical expenses”. Money held in the account will continue to grow for retirement and can be withdrawn for non-medical expenses, subject to restrictions beyond the scope of this article. In effect, a health savings account allows you to “deduct” medical expenses that otherwise would not be deductible due to restrictions on deducting medical expenses on Schedule A. Very few taxpayers are able to deduct medical expenses, as total medical expenses must be in excess of 7.5% of adjusted gross income to receive any benefit on Schedule A. Overall, a health savings account is a great tool to deduct medical expenses and grow funds in another tax-deferred vehicle, much like a traditional IRA, and you have up to the April 15th deadline to establish and fund an account.
Vehicle expense deduction
Business owners can obviously deduct the business portion of their vehicle usage against their business income. However, even if you are employed by a business or non-profit organization, it is still possible to deduct the business use of your personal vehicle. If you are an employee, you may be able to claim an itemized deduction for auto expenses on your Schedule A; however the deduction is subject to a 2% of adjusted gross income threshold. There are two ways to calculate the auto expense deduction, either by tracking actual expenses or by using the standard mileage rate, published by the IRS. CPA’s calculate the deduction both ways and choose the method that provides the largest deduction, however once you select a method, there are certain restrictions for moving back and forth between methods.
Non-cash charitable contributions
Much like contributions of cash to charities, non-cash items that are in “good condition” can be donated as well. If you have household items that you no longer need or want, donate them to a charity that accepts those types of goods and you can claim the “thrift shop value” of them as a donation on your taxes. Make sure to keep detailed records of all items donated and be sure to get a receipt from the charity. Donations under $250 in value do not require a receipt for substantiation, whereas donations valued in excess of $250 must have documentation from the charity. Donations in excess of $500 also require that Form 8283 be completed and attached to your return by your CPA.
Energy efficiency credit
After being a part of the Internal Revenue Code for 2011, residential energy credits took a brief hiatus from tax law in 2012 but are now back in 2013 (do you have whiplash yet?). Energy credits provide some great opportunities for tax saving, but you have to be careful given the “on again, off again” nature of these credits. If you are planning to make upgrades to your house (windows, insulation, HVAC, etc) in 2013, consult a CPA for help on which type of upgrades qualify for tax credits. Important note – DO NOT rely upon the advice of employees of big box retail stores for which items qualify for credits. We have seen many clients rely upon the advice of store clerks for items that did not qualify for energy credits as per IRS guidelines. One final note here is that for pastors who have housing allowances, this idea could have a double benefit as qualified upgrades to a house are able to offset housing allowance amounts while also potentially generating an energy credit.
Mortgage loan refinancing
Given the historically low interest rates, many Americans are refinancing mortgages on their primary residence. Loan origination fees or “points” are deductible and it is very easy to forget that you paid these fees when time comes to prepare your tax return. Loan origination fees must be amortized over the life of the loan refinance and can be deducted on your Schedule A over time. So, a $1,500 loan origination fee on a fifteen year mortgage would generate a $100 deduction per year for fifteen years. This doesn’t sound all that great, but if you are on your second or third refinance the prior refinance fees that have not amortized out completely are deductible in full in the year that you refinanced again. So… if you previously refinanced your home and had $1,200 of refinance fees that had not completely amortized out, these fees are deductible in full on your current year Schedule A! Again, as these types of fees are related to your home, this provides a potential double benefit for pastors with housing allowances.