Keep up with your investment expenses
Investment expenses also are allowed as miscellaneous deductions. Such expenses would include investment publications, payment for investment advice, calls to your broker and any other expenses related to the production of investment income.
Rather than buy your investment newspapers and magazines at the newsstand, subscribe to them and use your check as the receipt. If you use your computer for investment purposes (more than just tracking a few stocks), or subscribe to an Internet service for investment purposes, those expenses also become deductible
Can I give appreciated property to my children and shift the appreciation to them in order to reduce my taxes?
If you have an asset that has appreciated in value, you can give the asset to one of your children and possibly reduce your taxes -- assuming, of course, that your child is in a lower tax bracket than you are. According to the National Network of Estate Planners, Denver, "Income splitting and shifting wealth among family members is still an excellent estate and financial planning technique. You can give appreciated property to your child or children shortly before the property is sold so that the gain on the sale is taxed to them rather than to you. If your child is over 14, the entire gain is taxed to the child." If the child is under the age of 14, any gain over $1,450 is taxed at the parent's rate. Of course, before making the gift, you should be sure that you won't need the asset in the future.
Self-employed owners can deduct the costs of hiring their children as workers.
Hire your children. You're giving them money anyway. If your business is unincorporated and they're under 18, you won't be liable for any Social Security or Medicare taxes. Moreover, for 2002, you can pay each child as much as $7,700 (each child gets a $4,700 standard deduction plus $3,000 in an IRA), deduct the sum in full, and they pay zero taxes. (For 2001, the standard deduction was $4,550 and the IRA deduction $2,000, bringing the total to $6,550.) If you're in the 30% bracket in 2002 and hire two minor children, you save $4,620 in taxes ($4,700 x 2 x .30). This technique has been allowed for children as young as 7 years old. (In 2001, the savings were $4,061.)
Not only does this technique save income taxes, it reduces your liability for Social Security and Medicare taxes on your net income. This could save you an additional $2,356.20 ($7,700 x 2 x .153). The savings were $2004.30 in 2001.
Some of the above techniques are aggressive, but all of them are legal -- backed up with court cases, revenue rulings and the like. If they're appropriate for you, use them.
Contribute old clothes, furniture and other items to charity
Everybody knows that if you contribute cash to a charity, you get a deduction. You can also deduct the wholesale fair market value of non-cash contributions to your church, synagogue, Goodwill or any other qualified charitable organization. You can also deduct your mileage -- at a rate of 14 cents a mile -- if you use your car for charitable purposes.
Make sure you get a receipt. The receipt usually will say something like three bags of clothes, without any value given. But don't leave without it. Think of that receipt as green paper with pictures of dead presidents. If you're in the 27% bracket in 2002 (down from 27.5% in 2001), a $1,000 contribution of old clothes means $270 in your pocket. Don't forget your receipt.
Pay off debt with a home equity loan rather than credit cards
Personal interest is not deductible. Credit card interest, at rates ranging from 18% to 21%, is usually personal interest (unless it's used for business or investment purposes). You can't deduct it.
Pay off any credit card debt with a home equity loan or through a home equity credit line. The interest on that loan is deductible. Home equity debt is any debt secured by your house. The money can be used to pay off your credit card debt, for vacations, or anything else you want. The interest on up to $100,000 of debt is deductible as home equity interest. By shifting from credit card debt to home equity debt, you not only convert nondeductible interest into interest or expenses you can write off, but you'll probably pay a much lower interest rate.
How can I verify expenses for tax purposes?
The best records indicate who you paid, when you paid them, how much you paid and what type of expense was involved. Receipts and canceled checks are among the most effective evidence you can produce to defend a deduction. Credit card slips are also useful. Appointment books and informal expense logs can indicate where you were on a given day, who you saw and what you spent -- although they are not quite as effective as an itemized receipt or canceled check. Special record-keeping rules involve deductions for items such as business-related use of your car, travel, meals and entertainment.
How long should I keep my tax records?
According to "Get a Financial Life" (Simon & Schuster), "Each year add a new folder to hold your most important tax documents, including a copy of your tax return, income statements from your employers (W-2s), and income statements from your bank and mutual fund company (1099s). Save each year's folder for at least three years; if you are audited, the IRS can request up to three years' worth of tax records." After three years, throw out your supporting paperwork but hold on to a copy of the return, your attached W-2s and 1099s, and any other IRS forms you filed. In addition, be certain that you keep documentation for any permanent data such as documentation for items on a depreciation schedule or cost records on stock purchases. It is recommended that this data be retained indefinitely.
Any check that you write for improvements to your home or other property should be kept for as long as you own that asset. Records of the purchase of your home or improvements must be held as long as you own the house. If you have made any nondeductible IRA contributions, records of IRA contributions and distributions must be kept until all funds have been withdrawn. You should also save mutual fund confirmations or other records that show reinvested dividends and cash purchases of shares; these are part of your cost basis that reduce taxable gain when you sell shares in the fund.
The Internal Revenue Service can audit your income tax record for any reason within three years after the return is filed. As a result, you need to keep virtually all of the records used to complete your return for the same amount of time. Most tax-related documents, though, should be kept for at least seven years. That's because, if the IRS believes you have underreported your income by 25% or more, it has up to six years to launch an audit. There is no statute of limitations if you file a false return or don't file at all.
Do I have to keep records if I want to take a tax deduction for business use of my car?
If you want to take a deduction for business use of your car, the Internal Revenue Service requires that you keep adequate records. The necessary records include a mileage log book to claim the expenses under either the standard mileage allowance or the actual expenses method. In the mileage log book, you should record your business mileage and your total mileage. Remember to get documentation to verify the begin of year, and the end of year odometer readings on your car. In addition, if you plan to claim the actual expenses, you must keep the paid receipts for these expenses.
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