News & Insights

Don’t Fear the Taxman

By Fairport Wealth

By Deborah B. Feldman, CFP^®

In some way, shape, or form, we all look forward to the start of a new year – hopeful that it will be better than the last year (maybe eradicating Covid-19 or at least finding a permanent vaccine for it?) Anyway, this is also the time our thoughts turn to something a little less exciting and for some people, they actually approach it with dread: the beginning of the income tax preparation season. Most people know to collect the standard tax items such as W-2s, charitable contributions, 1099s, dividend and interest income, gain and loss information, property taxes, mortgage interest, etc. There are some lesser-known deductions that you may be missing, however. Please read on to see if any fit your particular circumstances:

1. Healthcare costs – Did you know that a portion of your long-term care insurance premiums can be a miscellaneous itemized medical deduction? Your health insurance premiums and out-of-pocket medical expenses can be as well. Do you have a relative in a long-term care facility? The costs incurred — if incurred primarily for medical care — are also deductible. These expenses are reported on Schedule A and are deductible as Medical Expenses to the extent that the total exceeds 7.5% of Adjusted Gross Income. If you are self-employed, you may be able to deduct 100% of your health insurance premium cost – this deduction shows up as a reduction to Adjusted Gross Income.
2. Sales Tax – Keep track of receipts for big-ticket purchases such as a car, expensive jewelry, furniture, boat, airplane, etc. If you itemize deductions, you’ll have the option of deducting sales tax or state income taxes.
3. Lifetime Learning Credit – Did you pay for classes to improve your skillset since high school? You may be eligible for a $2,000/year credit of the first $10,000 spent on the education. There is a phaseout for higher-income earners.
4. Strange Business Expenses – If you keep records and substantiate a business purpose for the expense, you may be able to take a deduction against income. For example, a warehouse owner who maintains guard dogs may be able to deduct the cost of dog food. If the warehouse owner has mice or rats and houses cats to keep the rodent population down, the cost of cat food may be a legitimate expense.
5. Daycare Expense – Do you have a babysitter take care of your children while you work or attend school on a full-time basis? You may be able to receive a credit for the cost. The IRS requires certain information be supplied to substantiate your entitlement to the credit, such as the name, tax ID number and telephone number of the person or organization providing the care, and the address where the care is provided.
6. Charity – Do you perform charitable work? Do you have out-of-pocket expenses in connection with the charitable work? Maybe you participated in making a quilt and had expenses associated with needles, material, thread, yarn, etc.? You may be able to take these expenses as a deduction – make sure to keep your receipts.
7. Deduction for Teachers – Teachers who pay for classroom items may be eligible for a tax credit of up to $250. Be sure to keep your receipts.
8. Self-Employment Tax – While the double tax rate of 15.3% (employer and employee portions) may be a bit daunting to your budget at tax time, you do get to deduct the employer-equivalent portion (7.65%) when figuring your adjusted gross income. Don’t miss this important adjustment.

Although this is not meant to be an exhaustive list, if it has piqued your interest and you have any questions about the upcoming tax season or the tax reporting on your custodial statements, please contact your advisor. We are always happy to hear from you.