1. Familiarize yourself with the income levels at which various tax breaks phase out. While it doesn’t make sense to make less income just to qualify for a tax break, shifting income from one year to another may sometimes be a smart thing to do.
Learn about the tax credits and deductions for which you might qualify. Then estimate your income, and if it will be just beyond qualification range, lookfor opportunities to defer income until a later year. Investment income can often be shifted, or you might delay the exercise of stock options or the receipt of a bonus.
2. Don’t pay tax on a home sale. The law lets you sell your home tax-free if you meet certain requirements.
The home must have been owned and used as your principal residence for at least two of the five years prior to the sale. Couples can enjoy $500,000 of tax-free profits in a home sale, while singles qualify for up to $250,000 of tax-free gain.
To the extent possible, time home sales to meet the requirements in order to enjoy tax-free profits.
3. Factor education tax breaks into your college planning.
First, there’s the American Opportunity credit for a percentage of qualified higher education expenses.
Second, the Lifetime Learning credit allows a deduction for a percentage of qualified expenses paid for any year the American Opportunity credit isn’t claimed, and it even appliesto job-related classes.
Third, you may qualify for a deduction for interest paid on student loans.
Fourth, education savings accounts allow annual nondeductible contributions for every child under 18, with tax-free withdrawals for qualifying education expenses. These section 529 plans are great tools to save for college expenses.
Check the income phase-out levels for these breaks. Careful planning is required to find what’s best in your particular circumstances read more...
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