Personal Income Tax Rate Reduction Table

Year

28% Rate

31% Rate

36% Rate

39.6% Rate

Want the Secret on How To Reduce IRS Taxes? Increase Your “Schedule A” Deductions to Dramatically Lower Your Taxable Income

Take maximum advantage of the medical expense deduction to reduce IRS taxes!

To take the medical expense deduction, you have to itemize on Schedule A of your 1040. Your deduction is limited to unreimbursed expenses that exceed 7.5% of your adjusted gross income (AGI). (See how to calculate your medical expense deduction in the chart below.)

If your insurance company (or some other source) reimburses any expenses you paid, your deductions have to be reduced by the amount you recovered. If the reimbursement is received in a different tax year, you can deduct the full amount you laid out during the year as long as you report the reimbursement as gross income the year it’s received.

Make Sure to Exceed the 7.5% Floor by “Bunching” Your Expenses

The most effective strategy to get the best bang for your deduction buck is to “bunch” your medical expenses. To do this, you just pay as many medical bills in one year as you can. Bunching is the best way to ensure your expenses are greater than the floor. If you think you’re going to exceed the floor in a particular year, move up whatever payments you can. For example, if you’ve been considering an elective surgery, have it done in a year so that you’ll exceed the floor. Prepay costs for continuing care, such as a home health care worker or nursing home facility. Have all of your family members make trips to the dentist and eye doctor. With bunching, you’re basically using a two-year plan for your medical expenses. In the first year, you’ll cram in all the medical expenses you can and take a big deduction. In the second year, you get no deduction (unless unexpected medical expenses arise). If you just paid the expenses as they came up, you would likely end up with no deduction in either year.

What Counts as a Deductible Medical Expense? More Than You Think!

You know that doctor bills, insurance premiums and prescriptions are deductible, but so are a lot of other things that you wouldn’t expect. For example, the mileage (plus parking fees and tolls) for trips to and from your doctor’s office (or other medical care facility), including rides you give to a dependent, are deductible at 10¢ a mile. And most people don’t know that if you have to take a trip for medical care that involves an overnight stay, the cost of your lodging is deductible. (This deduction, however, is limited to $50 per night, per person and meals are not deductible.) Other little-known, deductible medical expenses that can help to reduce your IRS taxes include:

• Laser eye surgery (called radial keratotomy, or RK) to correct nearsightedness.
• Health club memberships, if prescribed for your doctor to treat a specific ailment such as high blood pressure.
• Food for a special diet prescribed by your doctor to treat a disease (some conditions apply to this deduction-have your accountant check it out).
• Eyeglasses and contact lenses.
• Contact lens replacement insurance.
• Acupuncture.
• Taking a taxi or car service to the doctor’s office.
• Reclining chair, if prescribed by your doctor.
• Note-takers for deaf students.
• Lead paint removal.
• Childbirth classes for an expectant mother.
• Air conditioning system for allergy relief.
• Prescription medications and programs used to stop smoking.

Your Home May be Your Best Tax Shelter

Most taxpayers know that you can deduct the interest you pay towards your mortgage on Schedule A. What a lot of taxpayers don’t know is that you can deduct the mortgage interest expense for two residences. If you own more than two homes, you get to decide which one you want to be your second residence for tax purposes. These interest payments include any “points” (prepaid interest) you pay when you first buy a new home. Property taxes are 100% deductible for every piece of property your own.

The two biggest expenses of home ownership-mortgage interest and property taxes-are fully deductible when you itemize on Schedule A. And if you own more than one home, the expenses of both can be included in your deduction. This deduction alone is usually enough to send you over the standard deduction so your itemized expenses can kick in, greatly reducing your taxable income.

You can also take out a home equity loan on either of your residences, use the proceeds for whatever you want (except tax-exempt investments) and still deduct the interest you pay. So you can turn your regular personal non-deductible debt into a deduction by simply taking out a home equity loan and paying off your other debts, such as credit cards and car loans.

How to Never Pay Taxes When You Sell Real Estate

Perhaps the best-kept wealth-building secret is the tax advantage of real estate ownership. By following a few simple rules, you’ll never pay taxes when you sell real estate.

For your personal residence, the rules are simple. If you own your home, and used it as your primary residence for at least two of the last five years, you can sell your home and pocket $250,000 in profits-tax-free. A married couple, which files a joint tax return, can double this amount and gain $500,000 tax-free.

You can move into a house in need of some repairs or improvements this year. You make the improvements while you’re living there. In 2004, after you meet the two-year minimum requirement, you sell the house for a nice $70,000 profit. None of your profit is taxed.

How often can you claim these tax-free profits? Every two years for the rest of your life.

How valuable is this investment opportunity? If you’re in the 27% tax bracket, and you sell houses in your lifetime for a total gain of just $500,000, you will have saved $135,000. Plus, you now benefit from the future earnings when you invest that $135,000. The total value to you is probably in the range of $300,000 to $400,000.

As wonderful as that tax provision may be, the tax advantages of investment real estate are even better.

In a typical investment scenario, an investor purchases an apartment building for $500,000. He makes a down payment of $100,000 and borrows $400,000. Five years later, the building (after improvements in property and management) is worth $1,000,000. His current adjusted basis (purchase cost, plus major improvements, less depreciation) is $450,000. His current mortgage balance is $350,000.

When the investor sells the building for $1,000,000, his taxable gain is $550,000 ($1,000,000 minus $450,000). After paying a 20% capital gains tax of $110,000, he would be able to reinvest $540,000 ($1,000,000 minus $350,000 [mortgage] minus $110,000 [taxes]).

If he uses the $540,000 as a 20% down payment, he could purchase $2,700,000 of real estate.

The drawback to selling is the payment of the $110,000 in taxes. Wouldn’t this be more enjoyable, and definitely more profitable, if the investor could sell the building, not pay taxes and have all the profits available to reinvest?

The scenario now changes in the investor’s favor. He can reinvest $650,000 ($1,000,000 minus $350,000 [mortgage]). If he uses the $650,000 as a 20% down payment, he could purchase $3,250,000 of real estate.

The investor would have leveraged the $110,000 into $550,000. He will benefit directly from the increases in rents, the appreciation of the property and the monthly reduction of the mortgage balance.

How can you do this? Under section 1031 of the tax code, you can apply a process called a tax-deferred exchange. In essence, you will sell your investment property, escrow the net proceeds and invest all the money in other investment property.

Since you don’t pay the tax now, the tax is deferred until you decide to sell and pay taxes. Of course, if you only exchange, and never sell, you’ll never pay taxes on your gains.

What about your estate or your heirs-won’t they have to pay the income taxes you deferred? Absolutely not. Because the basis of the property will “step up” to fair market value upon your death, your estate or heirs can sell the property without paying any of the taxes you never paid (unless your estate comes into play in 2010, under which current law removes the benefit of stepped-up basis in exchange for getting rid of all estate taxes). No one will ever pay these taxes.

The rules for exchanges are relatively simple. You must identify the property you intend to purchase within 45 days of the closing on the property you sold. You must purchase the new property within 180 days of the closing on the property you sold. These time frames run concurrently.

The proceeds from the sale must remain in escrow with a third party (known as a qualified intermediary) until the exchange is completed.

How do you determine what portion, if any, of the sale and subsequent purchase causes a tax to become due? The exact method requires 1 1/2 pages of calculations on an IRS form. In general, however, if you meet the following requirements, you avoid the taxes:

1. Buy a more expensive property than what you sold.

2. Owe the same or more money on the new property as compared to the property you sold.

3. Use the entire net proceeds toward the purchase of the new property.

How To Reduce Your Property Taxes by 50% or More

If you think your real estate taxes are too high, there is a simple way to get them reduced-permanently. All you have to do to keep hundreds of dollars in your pocket every year is to challenge your assessment-it’s that easy!

Each year, thousands of taxpayers win appeals of their property tax bills. Experts estimate that at least 60% of U.S. property is over-assessed, so the odds are fairly good that you’re paying more in property taxes than you should be. In fact, in some areas 50% of the people who appeal their tax bills walk away with reduced assessments.

How To Dramatically Reduce Your Assessment

In order to dramatically reduce your assessment, you first must determine whether your assessment is incorrect. To do this, simply examine your property card. Since assessors are generally overworked, underpaid and often inexperienced, errors on property cards are quite common. Make sure your property is accurately described, including square footage of both your home and lot. Many assessments are made from aerial photos, and it’s not uncommon for the dimensions to be wrong. And an extra digit on your lot footage can dramatically increase your tax bill.

In addition to inaccurate land and building measurements, there are several other common errors found on property cards, including:

• Erroneous building description.
• Misstated building or land improvements.
• Unrecorded easements (or other factors that could detract from property value).
• Undocumented “defects,” such as termites or a leaky roof.

There have even been reported cases of property owners being taxed on their neighbor’s swimming pool! So it’s vitally important that you examine your property card for accuracy.

These errors are often simple to correct. The assessor’s office will frequently correct an obvious error right on the spot without the need for any formal procedure. They feel no need to argue over evident misstatements on the property card, such as an incorrect measurement. These errors can generally be cleared up informally with minor discussion and appropriate proof-a current photo, an appraiser’s report or a copy of the latest survey, for example.

The next step is to look at your neighbors’ property cards (which are public record and should be open to anyone). If your neighbors’ homes are similar to yours, but have lower assessments, you have automatic grounds for appeal. In fact, don’t limit yourself to just your immediate neighbors-if there’s a similar development across town, check out how they’re being taxed; the law provides that assessments must be fair across the entire district.

Be Sure Your Assessment is Not Unfairly High

Assessments are often based on market value multiplied by a prescribed assessment percentage. Then the tax rate is applied to the assessed value. To determine the market value of your residential property, look at the value of similar properties. In most areas, recent sale prices of comparable homes are acceptable values. The properties you use for comparison should be in the same general area, close to the same age and design, and have similar improvements to yours. The simplest source for this information is your local newspaper, as most of them now publish the specifics of recent home sales. Be sure to list the market values of as many comparable homes as you can easily find-the more properties on your list, the better.

What you’re trying to establish is that your property assessment is out of range with similar assessments in the same tax district. The properties need not be identical, merely comparable. The appraiser starts with basically similar properties, and then adjusts for differences such as swimming pools, garages and overhead power lines.

Once your accurate market value is determined, the tax assessment ratio is applied. For example, your local tax rate could be applied to 75% of your fair market value. Don’t assume your home is under assessed when the tax rate is applied against 80% of what you know the market value is-you could be over assessed and not know it. Fractional assessments often create confusion and trick property owners into staying quiet because they think they’re getting some kind of break. Don’t be fooled. If your home is assessed higher than the comparable properties, you have a case you can win-even if it’s a fraction of the market value.

How to File an Appeal

Once you’ve determined that your assessment is too high, and the error is not easily resolved, check out your tax jurisdiction’s appeal procedure. This information can be obtained from the assessor’s office and is sometimes even printed right on your tax bill.

The most important thing to find out is the filing deadline. In some areas, you may have as little as 30 days after receiving your bill to file an appeal. If you miss the deadline, it’s a lot harder to get an appeal.

Before you start anything, talk to your assessor. If your case is clear-cut, they may agree to surrender or compromise without a lengthy procedure. In many cases, the assessor can issue a letter to the appeals board rather than go through the bother of a public hearing.

The actual appeals procedure varies greatly from state to state. In general, though, the assessor’s office will give you a form to file and tell you about the deadlines involved. You’ll usually have to attach your proof (appraiser’s report, photos, etc.) to the notice of appeal.

Find out ahead of time what legal points you need to cover. You may need to show your property was assessed at a higher level than the legal standard or you may just need to show that your assessment was higher than the average in your area. Whatever the rules in your state, make sure you’re familiar with them, and that you have all your t’s crossed before filing your appeal.

If you follow all the procedures to the letter, your odds of success are high. And saving hundreds of dollars every year is well worth a couple of hours of time.

Move on to Part 2 of How To Reduce IRS Taxes: 12 Simple Steps To Legally Lower Your Tax Burden

I also encourage you to sign up for the free, three-times weekly Investment U E-Letter, headed up by renowned economist and best-selling author Dr. Mark Skousen. It’s full of actionable investing wisdom you can put to use right away to become a better investor.

Tax-Related Articles from the Investment U Archives:

• Investment Tax Advice: 5 Moves To Make Now
• 7 Tax Scams to Steer Clear of and 1 Real Way to Earn Free Money