Tax Strategies That Can Save You Money


By Chris L. Meacham, CPA,

Cornerstone Wealth Management

If you are not waiting for K1s from private investments, most likely, you just finished your 2013 taxes; the last thing you want to do is start thinking about next year’s taxes. However, now, at the beginning of the year, is a good time to start thinking about your 2014 tax return because it’s possible that you can start implementing some practices that can save you money. After all, according to one estimate, the U.S. government retains an additional $1 billion each year because of mistakes made by tax filers. Unclaimed refunds alone in 2010 added up to $760 million.

How many of you were looking forward to a nice tax refund? The truth is that it’s actually better not to receive a tax refund. I know that sounds counterintuitive, but a refund means that you withheld too much money, allowing the government keep your money interest-free for the whole year. Instead of withholding money so that you can receive that refund, you should adjust your W-4 so you receive more money in your actual paycheck. You don’t want to adjust it so much that you actually owe taxes either—the money-smart thing to do is have your withholdings match your tax obligations.

You also don’t want to miss out on any possible deductions. For example, there are many more deductions you can get from your home than just the interest on your mortgage. You can deduct all the points paid to get your mortgage, and depending on your income, you may be able to deduct your mortgage insurance premiums. You may also be eligible for tax credits for any energy-saving home improvements you make, such as solar panels, insulation, and energy-efficient windows.

When you sell your home, your taxable gain isn’t simply the sale price minus the purchase price. You can also subtract certain closing costs and selling costs. Selling costs may include real estate broker commissions, title insurance, legal fees, advertising costs, administrative costs, escrow fees, and inspection fees. You can also subtract certain purchase expenses, the cost of capital improvements, any depreciation, and casualty losses or insurance payments. But most of all, if you and your spouse sell a home you have lived in for two out of the five years you have owned it, you can shelter up to $500,000 in taxes on the sale of the home ($250,000 for single home owners). There are also deductions for starting a family, college, retirement, divorce, and running a business that you should discuss with your tax planner if applicable.

Most investors automatically reinvest mutual fund dividends. By using that strategy, your money is quickly reinvested and does not sit idle. In addition, you are effectively dollar cost averaging which can reduce volatility. But you will pay taxes twice on those dividends if you don’t remember to increase your tax basis for that mutual fund. You first pay taxes when the dividends are paid out. If you don’t increase your tax basis, you pay taxes on the dividends again when you sell your shares. So keeping track of dividend payments is essential.

If you are starting a business this year, you will definitely want to talk to your tax planner about setting it up so that you can avoid double taxation on dividends. When profits are distributed to shareholders in the form of dividends, the corporation has already paid taxes on that profit, but the shareholders are also taxed on those profits on the individual level. Setting your company up as an LLC or S corporation might be your solution.

Many investors have burned through any carry-forward losses and deductions from the recession and may now be looking for new ways to offset ordinary income. One strategy, if you are investing in startup businesses, is to become more actively involved in the business to benefit from any deductible expenses. If you have any investment-related debt, properly tracing the interest on the debt to specific investments could allow you to deduct the interest as investment interest expense. At Cornerstone, we care about your financial freedom, and we are more than happy to work alongside your tax planner or offer you an expert from one of our alliances. The strategies outlined in this article may not work for you and are no substitution to consulting with a tax professional.