Last Minute Tax Tips For Mariners
We’re all guilty. We don’t enjoy pondering many of the negative aspects of our lives. Having taxes prepared has been compared to going to the dentist more times than I’d care to remember.
Ronald Regan said, “The Taxpayer – that’s someone who works for the federal government but doesn’t have to take the civil service examination”. Most clients I speak to understand the nature of the tax system and are comfortable with paying their fair share. The issues arise over their interpretation of what a fair share is versus the governments’. Here’s my question – when has ignoring an issue made it better?
December for individual tax planning is similar to packing a sea bag for what could be a six month hitch. When I would sail, there were certain things I made sure to take along. They’re all common sense items – foot powder, toothpaste, email contacts, account info, specific clothing, etc… I know it’s a lot easier to get supplies in my hometown vs. Djibouti, Africa. And once she’s underway, you can’t turn around and go to Wal-Mart.
December 31 is the day before your voyage begins for tax purposes. Once we’ve gone into the new year it’s pretty much too late. Luckily, there’s a month left. Let’s look at some common sense tax planning items that could save you thousands before departure.
1. Have you maxed out retirement?
This is such an easy addition to any tax plan. The higher your income, the more beneficial retirement contributions can be. You’re excluding taxable income at your marginal tax rate (MTR). This is the rate that your next dollar will be taxed at. $10,000 contributed to a 401(k) plan by someone in a 25% bracket saves $2,500 in taxes (plus the state, if applicable). The savings can exceed your MTR in some cases.
If you’re getting hit with alternative minimum tax (which can effectively eliminate your employee business deductions), these contributions will reduce alternative minimum taxable income (AMTI). If you’ve lost child tax credits, these contributions may help put them back on your return. It’s all about adjusted gross income (AGI). It’s one of the most important lines on your 1040. If it’s too high, many benefits you may have qualified for will be lost. 401(k) contributions are excluded from gross income and reduce your AGI. Other retirement contributions (IRA’s SEP’s etc…) are deducted in calculating your AGI.
2. Does your employer offer other tax deferred benefits?
Even in the industry, companies are beginning to catch up with the Jones’. Also, if you’re married and your spouse works, perhaps they have benefits you should be taking advantage of. Perhaps you have a FLEX account. Many employers utilize these accounts that give employees the ability to put away tax deferred dollars for various expenses. Take daycare, it’s a necessary expense for some families. Many companies allow contributions from your salary for daycare that are excluded from taxable income. This would reduce your taxable income and that all important AGI as well.
3. Have you maxed out your deductions?
A lot of people don’t understand that you EITHER itemize or take the standard deduction. For example, if you assume your standard deduction is $5,300 and you had itemized deductions totaling $5,299, you effectively lost those itemized deductions. You only take your itemized deductions when they EXCEED the standard. Someone with an itemized deduction of $7,300 has a $2,000 advantage over the standard deduction. So where am I going? It’s the same as asking someone on a date – timing is essential.
Realizing that there is no monetary advantage in reaching the standard deduction, it’s fair to say that only the amounts above the standard deduction count. Here’s an example –
John Taxpayer Deductions Standard or Itemized Deduction utilized
Year – 1 – $4,600 Standard $5,300
Year – 2 – $5,500 Itemized $5,500 ($200) benefit
Year – 3 – $4,900 Standard $5,300
Let’s say that John is new to the Union. From his annual expenses – In year 1 he paid $2,000 towards his initiation fee. In year 3 he paid $1,000 to an attorney for financial work, and waited until he filed his taxes to pay his $2,000 state tax due.
Let’s change the timing. John pays the $2,000 towards his initiation fee, pays the lawyer $1,000 and makes estimated payments to the state totaling $2,000 all in year 2.
John Taxpayer Deductions Standard or Itemized Deduction utilized
Year – 1 – $2,600 Standard $5,300
Year – 2 – $10,500 Itemized $10,500 ($5,200) benefit
Year – 3 – $2,900 Standard $5,300
John had the same expenses. Timing afforded him an additional $5,000 in deductions. (that’s an additional $1,200 in his pocket!) By properly timing, we can maximize itemized deductions and utilize the standard deduction.
This is a baseline example, but it’s the beginning of the planning process.
4. Don’t trigger income if you don’t have to.
What am I talking about? Vacation. If you’ve made it this far without pulling 4 months of vacation pay, hold off until January. That way, you don’t report it until the following tax year.
If you have a high income year “sailed an unusual amount”, hold off on the vacation checks if possible. You’re probably in a higher bracket with the additional income. If you can wait, it will probably be taxed at a lower rate. Regardless, it’s almost always preferable to defer recognizing income until a later date.
5. Have Stock? Got Kids?
This will probably be the last year for this loophole. If you have stock that appreciated, selling it will trigger capital gains rates of 15% in most cases. It will also raise your AGI (which causes all that other stuff we’ve mentioned). If your kids are in college, under 24 and not working (or barely), you could gift stock to them (say $5,000), they could sell it and only pay 5% capital gains. You can gift up to $12,000 to most individuals without triggering a gift tax.
Saving 10% on $5,000 is still $500.
6. Take losses.
Sold an income property and going to recognize $50,000? Unload those loser stocks that have been haunting your portfolio. Capital losses offset capital gains. You can generally only deduct a capital loss of $3,000, meaning if you aren’t offsetting gains, a large loss keeps carrying over from year to year on your taxes until it’s exhausted. Remember, even though capital gains are taxed at 15%, they’re still going to increase your AGI and possibly push you into a higher bracket.
You can still make donations towards your charity of choice. With all the options out there, just make sure that your contribution is going to be tax deductible. Uncle Sam is cracking down on charitable contributions. Make sure your records adequately justify your contribution.
Also, you can donate items (vehicles, clothing, homes, boats) to the charity of your choice. Remember that the rules for vehicle donations have changed. In order to deduct more than $500 on a vehicle donation, the vehicle needs to have sold for that amount at auction and you need a record of this. The type of charity not subject to this restriction is one that gives the vehicle to underprivileged individuals. With these charities, you may be able to deduct the fair market value of the vehicle you donated.
8. Go Green
Energy credits are becoming increasingly popular. Certain insulation systems, exterior windows, exterior doors, and metal roofs are qualified for the credit. Advanced circulating fans and boilers are also included. The credit cannot exceed $500. That’s $500 more than you would have had a few years ago.
If you’re going super green and investing in solar power for heating, you may be eligible for a credit of 30% or up to $2,000. The system cannot be used to heat your pool or hot tub.
Hybrids are on the rise. Aside from it being really cool to drive a car without having to start the engine first they are helping us save the environment. The initial credit on a qualified hybrid is $3,400. As manufacturers’ sales pass 60,000 units the credit is phased out. Make sure your vehicle is eligible and what the credit will be if you’re purchasing a hybrid vehicle.
9. Change Your Status
Having children and getting married will change your tax galaxy. Children under 17 are eligible for a $1,000 child tax credit. Kids also warrant a $3,300 exemption (essentially a deduction) when claimed as dependants. Day care expenses can also qualify for additional credits.
Parents – two things to remember…
First, the year your kids turn 17, you lose the child tax credit. This is sometimes a shocker. Normally there is a “gap” of one year between kids reaching 17 and going to college. Once they’re back in school you can look into the Hope and Lifetime credits or a tuition deduction. Just remember, when they turn 17, there’s a $1,000 change in Uncle Sam’s favor.
Second, when the kids go off to school and take a part time job at Starbucks earning $3,100 make sure they say you’re claiming them as a dependant when they file their taxes. Every year, usually a boyfriend (accounting major), prepares a clients’ daughters’ taxes and says no one can claim her. This gets the daughter an extra $20 in refund money and I have to amend the return as mom and dad would lose $3,000. If a child says no one can claim her and you do, there will most certainly be issues. Uncle Sam is very good at cross checking social security numbers and will figure this one out with haste.
10. Stay Organized
Next year probably isn’t the best time to make sure you have all your logs in order. Take the time to make sure you have all the records you’ve been keeping. If you lost a ships’ schedule, it’s easier to send an email now versus April 12 of next year. Ask, ask, ask… Don’t wait until the years up. Address questions before the year is over. “If I had only known that” is something we try to eliminate at my firm.
If you’re still unsure, feel free to drop me a line. That’s what we’re here for! – JM