Tax Tips (not Tricks!)

[BrianB]

Now that we're in the midst of tax season I thought others might have tax-saving ideas or strategies they would like to share. I'll start with my new favorite:

Since we don't have "earned income" we cannot contribute to our IRA's, but we can contribute to our HSA's (we have an HDHP insurance plan). We took an additional distribution from one of our traditional IRA's (I am over 59.5 years old) of $8900 in 2018 and $9000 for 2019, then made contributions of $4450 and $4500, the annual limit, to each of our HSA's for each year. The distribution (income) and contribution (deduction) offset each other so there is no impact on our AGI or MAGI. This moved $17900 total from tax-deferred IRA to a tax-free HSA (as long as we use it for medical expenses) with zero taxes paid and no MAGI increase.

Yesterday I spent 3 hours combing through Quicken expense reports since 2015 (the first year we had an HSA). I found just over $10000 in medical, dental and vision expenses we had not submitted for reimbursement. It took a few phone calls to get copies of invoices & statements, but the result is $10000 in tax-free money distributed from my IRA into our pockets and our tax-free HSA's have increased by $7900!

Who's next...

[SecondCor521]

Quote:

Originally Posted by BrianB Now that we're in the midst of tax season I thought others might have tax-saving ideas or strategies they would like to share. I'll start with my new favorite: Since we don't have "earned income" we cannot contribute to our IRA's, but we can contribute to our HSA's (we have an HDHP insurance plan). We took an additional distribution from one of our traditional IRA's (I am over 59.5 years old) of $8900 in 2018 and $9000 for 2019, then made contributions of $4450 and $4500, the annual limit, to each of our HSA's for each year. The distribution (income) and contribution (deduction) offset each other so there is no impact on our AGI or MAGI. This moved $17900 total from tax-deferred IRA to a tax-free HSA (as long as we use it for medical expenses) with zero taxes paid and no MAGI increase. Yesterday I spent 3 hours combing through Quicken expense reports since 2015 (the first year we had an HSA). I found just over $10000 in medical, dental and vision expenses we had not submitted for reimbursement. It took a few phone calls to get copies of invoices & statements, but the result is $10000 in tax-free money distributed from my IRA into our pockets and our tax-free HSA's have increased by $7900! Who's next...

The first one is a good one.

With the second one, I think you can only reimburse yourself from your IRA for medical expenses to the extent that they exceed 7.5% of your AGI. It's not clear you took that limitation into account. Also, this article says that the IRA withdrawal needs to take place in the same tax year as the expenses:

https://www.investopedia.com/article.../02/111202.asp

My tax tips are pretty simple:

First, read the 1040 and your state income tax forms and see what things are deductible, exemptable, or create a tax credit for you. Spend some time strategizing how to configure your affairs to take advantage of the various tax breaks.

Second, spend some time at the end of each tax year looking at your tax situation. There are things you can do before December 31st that you can't afterward.

Third, keep up to date. Tax laws change with some regularity, creating new opportunities and eliminating old ones. You don't want to arrange your affairs and execute transactions only to find out that the tax break has expired or no longer applies.

Fourth, with big items investigate the tax rules before executing the transaction, not after. I'm constantly amazed at people who ask questions like, "I just exercised $500,000 in stock options, now what can I do to minimize my tax bill?" or similar things. Again, there are things you can do before the transaction that you can't do afterward.

...

I guess one thing I did was create a table for my particular situation with the various AGI phase-ins and phase-outs and limits so that I could realize what I was trading off when realizing AGI, and conversely how much AGI I could realize without losing certain tax breaks.

I also keep a document where I keep track of all of my tax items throughout the year. Then when I actually do my taxes I go through that document and that way I don't miss deducting something. I keep that document organized by tax form line number.

[BrianB]

Quote:

Originally Posted by SecondCor521 I think you can only reimburse yourself from your IRA for medical expenses to the extent that they exceed 7.5% of your AGI.

To clarify, we did NOT directly reimburse ourselves directly from the IRA. The IRA distributions were immediately put into our HSA's so the net effect was no change to our AGI or MAGI. Then we got reimbursements to ourselves from the HSA for the expenses. There is no 7.5% of AGI requirement for HSA reimbursements.

[RunningBum]

You said:

Quote:

the result is $10000 in tax-free money distributed from my IRA into our pockets and our tax-free HSA's have increased by $7900!

How did you do that without exceeding HSA contribution limits?

[SecondCor521]

Quote:

Originally Posted by BrianB To clarify, we did NOT directly reimburse ourselves directly from the IRA. The IRA distributions were immediately put into our HSA's so the net effect was no change to our AGI or MAGI. Then we got reimbursements to ourselves from the HSA for the expenses. There is no 7.5% of AGI requirement for HSA reimbursements.

Right. The wording on your OP was a little ambiguous.

[BrianB]

Quote:

Originally Posted by RunningBum You said: How did you do that without exceeding HSA contribution limits?

For 2018 the limit was $3450 per person plus a $1000 per person over-55 catch up, times two people = $8900

For 2019 the limit is $3500 per person plus $1000 per person over-55 catch up, times two people = $9000

Total $17900 for the two years.

[COcheesehead]

If anyone is selling a business I highly encourage them to become familiar with section 1202 small business tax breaks. It could save you a ton in cap gains.
In TurboTax all it asks is are you eligible for special treatment on the gains. If you don't check the yes box, you will cost yourself a boatload in taxes.
Here is more info https://www.thetaxadviser.com/issues...-story-07.html

[RunningBum]

Quote:

Originally Posted by BrianB For 2018 the limit was $3450 per person plus a $1000 per person over-55 catch up, times two people = $8900 For 2019 the limit is $3500 per person plus $1000 per person over-55 catch up, times two people = $9000 Total $17900 for the two years.

Got it now. Missed that you were talking about 2 years of contributions.

[pb4uski]

My favorite is for lower income folks.... in my case DS... is the Retirement Savers Tax Credit. Basically, the taxpayer gets a tax credit (not a deduction, a credit) for 10%, 20% or 50% of contributions to either a tIRA or Roth IRA... up to the amount of tax due. Lower income gets a 50% credit and it then phases into 20% and 10% as your income goes up.

Credit -- Percentage of contribution	Married Filing Jointly	Head of Household	All Other Filers
50% of contribution	Up to $38,000	Up to $28,500	Up to $19,000
20% of contribution	$38,001-$41,000	$28,501-$30,750	$19,001-$20,500
10% of contribution	$41,001-$63,000	$30,751-$47,250	$20,501-$31,500
No credit	AGI over $63,000	AGI over $47,250	AGI over $31,500

https://www.fool.com/retirement/2017...-save-for.aspx

If someone is only a bit above one of the thresholds you can do deductible tIRA contributions to get a larger credit as a percent of your contributions and then use Roth contributions to finish the remaining tax. It takes a little fiddling with it but the last 3 years DS has been able to make a combination of tIRA and Roth contributions and get every penny withheld back as a refund.

[pb4uski]

Another favorite is putting international equities in taxable accounts.... especially for taxpayers in the 12% tax bracket or lower... qualified dividends are 0% tax, non-qualified dividends are taxed at 12% or less but you get a tax credit for any foreign taxes paid. IME, the net tax is a credit as the foreign tax credit exceeds the ordinary tax on non-qualified dividends.

[jjquantz]

Here's one I ran across. If you live in Virginia or Georgia (maybe one other state?) you can only itemize on your state return if you have itemized on your Federal return. So check to see which way you are better off. In our case, because our itemized deductions are just short of the $24K standard deduction on the Federal we will end up paying a little bit more to the feds, but we will save about 5x as much on our state taxes.

[38Chevy454]

Quote:

Originally Posted by pb4uski My favorite is for lower income folks.... in my case DS... is the Retirement Savers Tax Credit. Basically, the taxpayer gets a tax credit (not a deduction, a credit) for 10%, 20% or 50% of contributions to either a tIRA or Roth IRA... up to the amount of tax due. Lower income gets a 50% credit and it then phases into 20% and 10% as your income goes up. Credit -- Percentage of contribution Married Filing Jointly Head of Household All Other Filers 50% of contribution Up to $38,000 Up to $28,500 Up to $19,000 20% of contribution $38,001-$41,000 $28,501-$30,750 $19,001-$20,500 10% of contribution $41,001-$63,000 $30,751-$47,250 $20,501-$31,500 No credit AGI over $63,000 AGI over $47,250 AGI over $31,500 https://www.fool.com/retirement/2017...-save-for.aspx If someone is only a bit above one of the thresholds you can do deductible tIRA contributions to get a larger credit as a percent of your contributions and then use Roth contributions to finish the remaining tax. It takes a little fiddling with it but the last 3 years DS has been able to make a combination of tIRA and Roth contributions and get every penny withheld back as a refund.

I was going to bring this up. I do this for my sister, she does not make much income at all. I am trustee for a trust that I make contributions to her Roth IRA, the saver's credit is a great advantage. Although she could never save much on her own, by me making the contribution it helps her now and in the future.

[BrianB]

Quote:

Originally Posted by pb4uski My favorite is for lower income folks.... in my case DS... is the Retirement Savers Tax Credit. Basically, the taxpayer gets a tax credit (not a deduction, a credit) for 10%, 20% or 50% of contributions to either a tIRA or Roth IRA... up to the amount of tax due. Lower income gets a 50% credit and it then phases into 20% and 10% as your income goes up

Yes! I like this one a lot! We can't use it but our Daughter has - last year 50% of $2000, this year probably just 10% of $2000 as her income has gone up sharply. Still, free money is free money... If the contribution is into a traditional IRA or an HSA then the deduction also reduces tax due or maybe even gets a person under the income cut-off levels.

Quote:

Originally Posted by pb4uski Another favorite is putting international equities in taxable accounts.

Daughter has some Canadian ENB (Enbridge) in her after tax account. I just checked her Fidelity annual statement and sure enough it's shown on there. Now if Turbotax will import it and handle it correctly everything will be great.

[Spock]

For state income tax: establish residency in a no income tax state.
https://dakotapost.net/rates-service...kota-residency

[Sunset]

Doesn't apply to me, but if you are Canadian, live in Canada for 4 months, then USA for 4 months, then Ireland for 4 months.
Since Canada taxes like most countries on resident status, just don't be a resident of any country.
At least that's the theory according to a book.

[sengsational]

Quote:

Originally Posted by Spock For state income tax: establish residency in a no income tax state. https://dakotapost.net/rates-service...kota-residency

The hard part is leaving your current state, not finding another state to take you. You must not be in any other state for more than 6 months, and you need to convince the state you're leaving that you've left.

[pb4uski]

Quote:

Originally Posted by sengsational ....You must not be in any other state for more than 6 months...

Care to elaborate? Not sure what you mean.

For example, someone who lived and worked in NY retires and buys a condo in FL.

The change their drivers license, car registrations, voting registrations, homestead declarations, banking, etc to FL, but still have a property in NY.

The following year, they spend 4 months in NY, 4 months in FL and 4 months traveling the world.

IMO, they are a FL resident and not a NY resident.

Now if they spend 6 months in NY, 4 months in FL and 2 months traveling, they have some nexus risk but can probably still legitimately claim that they are FL residents.

If they spend 7 months in NY and 5 month in FL then it is more gray... if NY says they are resident they might lose.

[sengsational]

Your 4/4/4 example is obviously not a problem.



The 7/5, seems more of an issue. If it was 7 then a move, then 5, the states would want to split it. If you'd already done a 4/4/4, then the 7 state would have a tough time catching you, but I was focusing on the letter of the law. I can only tell you what I've come to think based on reading posts from various posts on the internet, so you know..."highly trustworthy" From what I understand the letter of the law is: if some state proves that you've spent 365/2 + 1 nights in their state, you owe them income tax for the year. I'm sure there are differences between states. Like if they don't have an income tax, the state is not likely to have and/or enforce such a law.