Taxes for Individuals

Most common areas for tax breaks

Tax law changes so frequently that you must be concerned with tax planning year-round, or you’ll miss opportunities to lower your tax bill.  Below are some common areas that can mean big money savings with proper planning.

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, look for 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 applies to 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.

4. Invest to take advantage of lower long-term capital gains tax rates. You can cut your tax bill significantly by holding an appreciated investment long enough to qualify for long-term rather than short-term tax treatment.

5. Conduct an investment review to confirm you have the right investments in your tax-deferred accounts. To take best advantage of the lower long-term capital gains tax rates, investments that produce interest income should be held in tax-deferred accounts, while those that produce capital gains should be held in taxable accounts. Putting capital gain investments in tax-deferred retirement accounts could turn income that would be taxed at lower rates into ordinary income taxed at much higher rates.

6. There’s never been a better time to contribute to an IRA. Even nonworking spouses may be able to contribute to an IRA. Individuals covered by a retirement plan at work or whose spouses are covered by a plan may still qualify to make deductible IRA contributions if their income doesn’t exceed certain levels.

7. Your IRA options may include a Roth IRA. With a Roth IRA, your contributions won’t be tax-deductible, but the account will grow tax-free, and you won’t pay federal income tax on distributions from the account once it’s been in existence for five years and after you’ve reached age 59½.

8. Consider rolling your IRA into a Roth. If you have a traditional IRA, you might want to consider rolling your existing IRA into a Roth IRA. You’ll have to pay income tax on the rollover, but the account can escape federal income taxation thereafter.

9. If you work at home, get details on the home office deduction. More people can now qualify to take a deduction for home office expenses. Your home office may qualify as your “principal place of business” if you use it regularly and exclusively for administrative and management activities but perform the income-producing activities at another location.

Realize that in tax planning, the earlier you start, the more effective your tax-cutting efforts will be. Also realize that not every strategy is appropriate for everyone.  Have questions?  Consult with a Dugan & Lopatka tax planning professional at (630) 665-4440 or

related articles