Summer is typically when we enter vacation mode and take a break from things that require a lot of work, so the last thing you want to think about is your taxes. But summer is also busy with a number of key life events, so while you still have some down time make sure you understand how your summer activities can actually help create important tax saving opportunities.
Life Changes Bring Tax Changes
Big life changes that happen in the summer can have a significant impact on how much you’ll pay in taxes. Whether buying a home, getting married or having a child, your tax bill could change significantly, so it’s worth setting up time with a tax professional now to better understand your new tax opportunities.
The summer months are when real estate activity swells, so if you’re one of the many who purchased a new home or refinanced this summer, you may be able to write off some of the closing costs at tax time. While lender and lawyer fees aren’t deductible, you can write off any points you purchased to lower your mortgage rate. You may also get a deduction for real estate and transfer taxes as well as any prorated property taxes paid at closing.
If you’re among the one-third of newlyweds who had a summer wedding, you’re now eligible to save more. For example, a California couple earning $100,000 each could save more than $4,000 once they’re eligible to file jointly.
Additionally, summer is often a baby boom. According to data from the Centers for Disease Control and Prevention (CDC), August and July are the most popular months for births, with over 700,000 newborns making their debut. If you’re a taxpayer in the 28 percent bracket you would pay $1,120 less in taxes this year after having a child, including those who choose to adopt.
But even if you haven’t had any major life changes, it might be worth reviewing your withholdings if you got a large refund last April. The average taxpayer received a refund worth $2,700 last year, and while that’s a nice windfall and feels good to get money back from the government, it also means you’re giving Uncle Sam an interest-free loan worth more than $200 per month all year. So you should try and adjust your withholdings to ensure you can put that extra money to work for you, and not the other way around.
Conventional wisdom holds that you should always max out your 401(k), taking advantage of tax-free returns and compounding over the long-term. If you’re lucky enough to have a low-fee 401(k) plan with attractive investment options that advice may hold true. However, the average 401(k) carries fees of 0.55 percent of assets, so you should weigh those fees against the fees of other investment options.
If your employer offers a 401(k) match (the typical plan offers a 50 percent match on the first 6 percent of savings), you should always contribute enough to get that match. A risk-free 50 percent return on savings will more than offset high fees or poor investment choices. After that, consider diverting additional retirement savings to an IRA or a taxable investment account that offers low fees and unique investment features. Also, if you got a new job this summer you might consider rolling over your old 401(k) into an IRA. This can have several benefits, but be sure to read the fine print to make sure a rollover is right for you.
Adjusting your retirement savings plan now gives you another five months to contribute cash across the right accounts for you. While the deadline for contributions to tax-deferred accounts isn’t until December for 401(k)s and April for IRAs, spreading out your deposits can put less pressure on your year-end cash flow.
To Sell or Not to Sell
As second-quarter earnings season comes to a close, you might be in an open window now and sitting on some gains in employee stock or other concentrated holdings. As we’ve highlighted before, it makes sense from a numbers perspective to sell your holdings as quickly as possible so you can improve the diversification of your portfolio.
But what if it’s at a loss? Selling can still be a smart strategy, since harvesting some of those losses now not only allows you to transition into a diversified portfolio, but it can help offset any capital gains taxes you may otherwise owe at the end of the year. And the good news is, even if you didn’t have capital gains this year, you can carry forward those harvested losses to offset capital gains in the future.
If you moved this summer for work-related reasons, you can deduct moving-related expenses not covered by your employer, including mover fees, your traveling costs, and up to 30 days of storage for your things. To qualify, your new job must be at least 50 miles farther from your previous home than your old job was to that home. Keep in mind you must work a minimum of 39 weeks in your first year in the new home, or you’ll have to pay back the deductions next year.
If you have a qualified second home (which includes, believe it or not a recreational vehicle) with sleeping, bathroom, and kitchen facilities, you can write off mortgage interest and real estate taxes on that property or vehicle. To be eligible for that deduction, you need to use it exclusively for recreation, and you can’t rent it out for more than 14 days per year.
On the flip side, if you have a rental property that you rent out more than 14 days per year (even through AirBNB), you’ll have to pay taxes on the income. However, you may be able to write off maintenance, depreciation, and other expenses associated with it. But in order to get the rental income deductions, you can only personally use the property for either 14 days or fewer than 10 percent of the total rental days, whichever is greater.
People often don’t realize that many expenses related to their kids accrued in summer can yield important tax savings next spring. For instance, if you send your kids to summer day camp (overnight camp isn’t covered) you could be eligible for a deduction on up to 35 percent of the first $3,000 in tuition payments for one child or $6,000 for multiple children. To qualify, the child must be under 13 and you (and your spouse, if filing jointly) must be working while they’re at camp. However, if you have a dependent-care Flexible Spending Account (FSA) through your employer you need to use that money first, and you can only “double dip” and earn the child care credit for an additional $1,000 if you’re sending two or more children to summer day camp.
If you have an older child that you hired to work for you this summer, you can deduct the wages, just as you would deduct the wages of any other employee. If your child earns less than the standard deduction ($6,350), she won’t have to pay taxes on the earnings, but she will be eligible for IRA contributions.
Fall college classes are beginning this month, which means that your first tuition payment is likely due soon as well. There are several tax credits and deductions available to students and their parents. If you’re sending a child to college (or attending yourself), the American Opportunity Tax Credit offers an annual credit of $2,500 per student on qualified higher education credits. The credit starts to phase out for taxpayers making more than $90,000 ($180,000 for couples filing jointly.) And if you’re taking classes this summer or have gone back to school for work-related training, you can deduct your out-of-pocket tuition costs.
There are a lot of both big life changes and higher cost routine activities that happen in the summer that you can take advantage of come tax time. But it’s important to start planning now to make sure things don’t fall through the cracks. Whether you’re a do-it-yourselfer or you work with a tax professional, starting the prep work during the “lull” of the end of summer will give you a headstart on all your eligible tax savings so you can keep more money in your pocket come April.
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