SMART TAX SAVING TIPS

You just got done paying taxes or filing an extension and are grumpy. If you are smart, you will use this miserable event to save some cash for next year.

Using This Years Taxes to Save On Next Years Taxes

For most people, preparing and filing taxes is the equivalent of sticking a pin in a body part. It simply is not fun. Heck, it is not even amusing. One of the reasons is you inevitably find some part of the process where you wonder how you could possible not have more deductions or credits. You fully realize you should tweak your finances to maximize certain expense areas and, by God, you are definitely going to do it for next year. This admirable goal, much like a New Years Resolution, fades into antiquity after about a month. You should not let this happen!

There is no better time than now to proactively plan for savings on next year’s taxes. Having just completed your taxes, you inherently know where you got hurt. Even if you do not, you inevitably felt like you paid more than your fair share. To avoid this, you need to do some tax planning.

Stop groaning. Tax planning may sound boring, but it actually very exciting if you think about it the right way. If I told you a trip to Vegas would definitely result in $2,000 in your pocket, would you be excited to go? Of course you would. Well, tax planning has the same the result. You need to focus on the amount of money you will save.

The best way to go about tax planning is with a proactive accountant. Yes, they cost money, but they will save you far more than you spend and you can write off their fees. A win-win if ever there was one.

When selecting a CPA, you want a proactive one. You want them to look at your tax return and tell you where money can be saved. Then you want to know exactly how much you would have saved last year if you had taken the recommended steps. Yes, it will be painful, but it will also motivate you to get on board with their plan and stick with it.

Paying taxes this year was undoubtedly a painful experience. Analyze the specific areas that caused you pain, and next year will be blissful.

What is mortgage interest?  It is any interest you pay on a secured loan when you bought your first or second home. The loans include the mortgage to buy your home, a second mortgage, a line of credit or a home equity loan.  The loan must be secured debt or it will be considered a personal loan and the interest is not deductible.

For the average consumer who has managed to acquire credit card debt, car loans, and various other small debts, is the mortgage interest, especially with an interest only loan an answer to mortgage interest deductions and the elimination of non-deductible interest?

What options does the average consumer have in accommodating the tax need in relation to the housing need?  What about the interest only loan option on a new house mortgage?  Today’s housing and mortgage market has seen a tremendous growth in mortgage packages, variety and amount.  The mortgage interest deductible on the interest only loan option, once thought to have gone the way of the Edsel automobile, is back today and in use by the masses.  The mortgage market has seen an unbelievable increase in the interest only loans from just a mere sliver of the market a few years ago, to around 25% of the market share today.  That’s huge growth, especially when you talk less than five years to experience that growth.

What benefit does the mortgage interest (especially the interest only loan) bring to the table, and does this benefit the homeowner as a taxpayer?  This is one question the mortgage lender probably won’t be able to answer for you, and one you probably won’t think to ask.  But you should, because it’s one question that can make a difference to you and to your federal tax return and the amount of the mortgage interest that will actually provide you with a federal income tax deduction.  A mortgage interest deduction is one of the best financial reasons to purchase a home.  Who gets the deduction?  You do, if you are the primary borrower, legally obligated to pay the debt and actually make the payments.  If you are married and both of you signed the loan then both of you are the primary borrowers.

The interest only loan and the amount of interest you can deduct on your income tax return are one and the same if your income levels are low enough; the concern for the average consumer is the total dollar value they get to take off their tax return.  Quite often, the deductions for the consumer aren’t enough to contribute to the bottom line, because the income level the percentage of deductible interest is calculated on is simply too high.  Higher dollar amounts in interest will usually mean a greater possibility of a greater deduction.  There can be limits to the tax deduction.  Your tax deduction is limited if all mortgages on your home are either more than the fair market value of your home or more than one million dollars ($500,000 if married and filing separately)

The greater deduction would be the only advantage to the interest only loan as far as the taxpayer is concerned, unless of course, they use the money saved from the interest only loan to fund a 401k, an IRA, or an MSA (that’s a topic for a completely different paper).  The mortgage interest and especially the interest only loan is sold to the consumer as a way to afford more house, pay off credit card debt, or provide a means to fund a savings of some kind, and if that’s true, it can be used for that purpose.  And if you’re considering paying off those high interest credit cards, the mortgage interest you’re charged on the interest only loan is fully tax deductible, while the credit cards are not; a word of caution, however, make sure you don’t turn around and use those credit cards again, putting yourself right back where you started from, just with a bigger interest payment and less house equity.

Why has the market experienced such growth?  It’s not totally related to the income tax benefit; the home mortgages of today satisfy a common desire for the consumer: instant gratification of bigger and better.  Such is the case when it’s time to make those needed repairs, or house expansion.  A second mortgage makes it possible to retain the same monthly mortgage payment, and still pull a lot of equity out of your home.  This may sound like the ultimate solution, but is it really?  It also adds to the amount of interest an individual can deduct at the end of the year; and if income levels are growing, the interest expense must grow in order to keep up.  Now, this is a somewhat skewed way of looking at the benefit of a mortgage, but it figures right into the same scheme as the elimination of credit card debt and saving for 401(k) s as a valid reason to borrow money against your home.

Remember that your home mortgage must be a secured loan from your main home or second home.  No deduction can be made for a mortgage from a third home, fourth home and so on.  The mortgage and the resulting interest are great tools, when used by the right people, in the right situation.  For the average consumer and long-term homeowner, unless you think a better deduction on your tax return is worth the forfeiture of equity in your home, you’d better think twice before re-financing with a second mortgage that generates more interest, but less equity.

You’ve probably read in the newspapers of various celebrities and successful business who manage to avoid or at least substantially reduce their UK taxes – whilst a significant proportion of the general public are paying close to 50% of their income in tax. Well, there’s nothing to prevent you using some of these techniques to slash your UK taxes as well, depending on your circumstances.

Here’s some of the techniques that the Rich & famous use:

Make the most of your offshore status
People like Mohammad al Fayed make tremendous use of their non UK domiciled status. If you’re an overseas national and were born overseas (typically your father will also have been a non UK domiciliary at the date of your birth) you can avoid paying any tax on your overseas income and capital gains. The main condition to this is that you need to keep the income or proceeds outside of the UK. As you’d expect though there are ways around this to enable some of the proceeds and income to be brought into the UK free of taxes.

Make the most of your spouses offshore status.
If you’re lucky enough to have a husband or wife that is either non UK resident or non UK domiciled you can use their offshore status to your advantage. This is what Philip Green did (the billionaire owner of BHS). His wife is a resident of Monaco and he ensured that she extracted dividends from his UK companies free of UK (and overseas) tax. This saved him paying UK tax of around £200Million that he would have otherwise had to pay if he’d extracted the dividends.

Using a tax efficient holding company.
Famous bands such as U2 and the Rolling stones make use of some of the best offshore tax companies to avoid paying tax on much of their income. U2 for example used to fall within the Irish tax regime which had a longstanding tax exemption for artists. When this loophole was tightened up, they moved their holding company to the Netherlands to take advantage of tax free royalties. There are lots of other countries that can also offer tax efficient holding companies such as Spain, Denmark and Cyprus.

Using tax efficient trading companies.
Multinationals such as Coca Cola make good use of a string of offshore companies to ensure that they can redistribute profits within the group to reduce the overall ‘effective’ rate of corporation tax. (It is reducing this effective rate that is the main focus of many in house tax lawyers lives!)
Actually move overseas Celebrities such as James Blunt, Michael Schumacher and Boris Becker have all moved offshore to ensure they have only limited UK tax obligations. They’ve based themselves in Switzerland and are local residents. The beauty of Switzerland is the ‘fiscal deal’ which allows the tax liability to be fixed at an artificially low amount.
So there you have it – some ideas to get you thinking about how you could use the offshore tax planning techniques of the rich and famous. For more detailed articles on offshore tax visit www.wealthprotectionreport.co.uk

Now, here’s a real tax savings to the individual taxpayer with dependents.  The child tax credit is a direct federal income tax credit based on the number of dependent children in your family. This federal tax credit is available to provide credit to taxpayers with income below certain established levels.   Started in 2003 and going to 2010, the maximum credit per child is $1000 and is first applied to reduce or eliminate the taxpayer’s federal tax liability.  In 2011, the Sunset Provision will decrease the tax credit unless the credit is extended or made permanent.

How does this federal tax credit work and who qualifies for this credit?  Well, let’s start with the last question first.  Every family with children qualifies, however the federal tax credit phases out when income is above $110,000 for married filing jointly, $75,000 for single, head of household, or widow, and $55,000 for married filing separately.  In addition, the child tax credit might be limited by the amount of income tax you owe as well as any alternative minimum tax you might owe. But like everything else in this world, there are exceptions.  If the amount of your child tax credit is greater than the amount of federal income tax you owe, you may be able to claim a portion or all of the difference as an “additional” Child Tax Credit.

First exception:  if your earned income exceeds $10,750, you may be able to claim up to 15 percent of that amount.  Second exception:  if you have three or more qualifying dependent children in your family, you may claim up to the amount of Social Security taxes you paid during the year, minus any Earned Income Tax Credit you received. If you qualify under both these exceptions, you receive the greater of the two amounts, up to the difference between your federal tax liability and your regular Child Tax Credit.  You may want to seek a tax professional for help with this credit.

Now, to answer the “how does it work” aspect; the best approach might be to simply break down the requirements, and explain each fully.  The child tax credit is the responsibility of the Internal Revenue Service (IRS), and the credit issuance is determined through the federal tax returns the individual taxpayer completes each year.  Taxpayers must complete either the 1040 or the 1040A and the IRS form 8812.  The IRS will then determine eligibility, and process accordingly; the requirements and limits change each year, so the individual’s eligibility may change each year.

In order to qualify, a family must have earned at least $10,500 in income, and that figure will rise each year, according to inflation.  There must also be at least one qualifying child.  In order to be classified as a “qualifying child”, the child must meet the following requirements: under age 17 of the tax year, claimed on your tax return as a dependent, must pass the relationship test (son, daughter, stepchild, grandchild, brother, sister, foster child, adopted child, etc.), be a US citizen or a resident alien, and have a social security number.

During its original year of inception, many families with qualifying children were mailed an advance federal income tax credit of either $300 or $400 dollars; but they were also told this would reduce their end-of-year tax credit, dollar for dollar.
The method used for determining the tax credit is fairly simple, and is not difficult to calculate; however, any individual taxpayer with uncertainty should seek the advice and assistance of a tax professional when preparing their federal tax return.

The credits, as stated earlier are claimed when you complete a 1040 or 1040A and file your returns with the Internal Revenue Service.  Although many individual taxpayers pay for a professional to complete their federal tax returns each year, there are qualified preparers that are available free of charge each year, through the IRS; either way, make sure that you communicate your qualifications for the child tax credit, and check your tax return to see that the credit was applied.  You do not want to let this tax credit slip by.

The child tax credit, along with the Hope and Lifetime Learning credits are a direct means to affect the individual taxpayer’s tax liability and offer some level of tax relief.  This is meant to help parents with the costs associated in raising children, and educating them.  Most often, the child tax credit is a way to alleviate the existing federal tax liability for middle-income taxpayers.  For the extremely low income families, there is often no income tax due, so there is no allowable tax credit.  Although it does not help the poverty level families as a form of federal income tax refund or tax-free income, it does help to alleviate any federal tax liability.  The Earned Income Credit is used by many poverty level or low-income families as a supplement to their earned income.

The line under your income on your pay stub is where these two systems differ. With the uneducated tax system, you deduct the three lines under your income and the remainder is what you receive. With the educated tax system, the first line is your reported income as with the uneducated tax system. However, the second line is the money you spent on the business, and you pay taxes on what is left. This is because when a business spends money it is called a business expense or tax deduction. Therefore, having your own business and being in the educated tax system, you can reduce your taxes by 40-70%. To break this down even further: If you are making $35,000 a year this could save you up to $10,000. That means it does not matter if you are making millions of dollars or a few thousand dollars. These strategies apply to you! A marginally profitable business can become a thriving business by applying these strategies.

A case study: One of my students, Stephanie, was making $50,000 a year. She took these strategies to her CPA who had been working with her families for years and always had her best interest in mind. He replied that although this program sounded interesting, he was already utilizing every deduction available able to her. Stephanie’s CPA agreed to participate in a conference call with me at Stephanie’s request. Stephanie’s CPA explained that she was paying $12,000 in taxes. While this was much less than the average person, she could have been paying even less. I introduced three strategies: helping her to reduce her FICA, deducting her healthcare, deducting education (both her and her daughter’s). We were able to reduce her total taxes paid to $800. In 15 minutes and with only three strategies, we were able to save her over $11,200!

I have had students save well over $100,000. Just think what you could do with that money!

We can start by converting your largest expenses into business expenses. We can teach you lesser known deductions (e.g. travel and entertainment, medical, seminars, books, etc.) and shift them over to business expenses. You pay them with pre-tax dollars and not after-tax dollars, reducing your taxable income.