While filing a tax return is a once-a- year event for most people, saving on your taxes is an everyday process.
According to the Internal Revenue Service (“IRS”), “tax season” officially began on January 29, 2018, and will continue through April 17, 2018. During this time, the IRS will accept millions of tax returns.
When it comes to filing a tax return, all taxpayers have the same general goal, and that is to maximize their tax return in terms of saving money.
In an effort to best maximize your tax return, start thinking about the different ways you can save on your taxes everyday, particularly as it relates to life’s most common expenses.
Common Expense – House
One common, everyday expense is a house.
Under the new tax plan, many 1031 exchanges have been eliminated. However, a 1031 exchange relating to real property is still permissible.
If you are thinking about selling your property, whether it is land or a house, consider a 1031 exchange.
A 1031 exchange allows you to take the money from the sale of your property and put it towards another property (or multiple properties) of equal of greater value (than the property you originally sold) tax-free.
Because this transaction is treated as an exchange, not a sale, as a taxpayer, you do not have to pay taxes on any capital gains from the initial sale of your property.
While a 1031 exchange can help you save on your taxes, there are some limitations.
First, upon selling the initial property, you must identify the property you subsequently want to purchase within 90 days (of the initial sale).
Secondly, you must purchase the subsequent property within 120-180 days of selling the initial property. These limitations can make taking advantage of 1031 exchange troublesome, particularly for those looking to purchase a home.
For example, as one looking to buy a home, how often do you identify and purchase a home within 180 days of selling your former home? Sometimes issues arise during the buying process that does not allow you to identify and purchase a home within 180 days of selling your former home.
Accordingly, if you plan to take advantage of a 1031 exchange when selling and buying a house, already identify the home you wish to subsequently purchase after selling your home.
Common Expense – College
Today, a college education can cost upwards of $150,00.
If you are contributing to your child or grandchild’s college education, consider saving for their college education in a tax efficient manner.
Although there are numerous ways to save for a loved one’s college education, there are two methods that have become increasingly beneficial. The first method is to use a state sponsored 529-college savings plan.
Compared to other plans, like a custodial account, a 529-college savings plan has few rules.
Further, with a 529-college savings account, you do not have to give up control of the money invested in the account once your child or grandchild turns 18 or 21 (like you would have to do with a custodial account).
Finally, as an added benefit, if the child or grandchild who the account was intended for does not go to college, you can switch the account to another child or grandchild.
The second method of saving money on a loved one’s college education is through the use of Coverdell Education Savings Account. A Coverdell Education Savings Account allows a parent or grandparent to contribute up to $2,000/year for their loved one’s education.
Under the new tax bill, you cannot deduct the money you invested into this account.
However, the money you invest into the Coverdell Education Savings Account is tax-deferred, and can be withdrawn tax-free to pay for your loved one’s education bills.
Moreover, the Coverdell Education Savings Account is not limited to a college education. It can also be used to pay for private school tuition and other education-related costs for elementary and high school students.
Common Expense – Estate
While not necessarily an everyday expense, your estate is still very much an expense upon your death.
Like any other asset you own, your estate can be taxed. One way to make sure that your estate and you are saving money is to avoid probate.
One popular way to avoid the probate process is to use will substitutes. Examples of a will substitute are an IRA and a retirement account.
If you currently use will substitutes, such as a trust, make sure it is current. If there is any deficiency with your will substitute, the will substitute will go to your estate and pass through probate process.
In the event the will substitute passes through probate (as opposed to the intended beneficiary), the will substitute may be taxed along with the rest of your estate. Therefore, in order to avoid costing your heirs, make certain that your will substitute is up-to- date.