When completing their income tax return, taxpayers can make certain choices or elections that can really impact the amount of tax that’s due. Here are a few common examples that can create tax savings opportunities if you elect the correct option.
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Tax filing status. Typically, filing a joint tax return instead of filing separately is beneficial to a married couple, but not always. For example, if one spouse has a high amount of medical expenses and the other doesn’t, your total medical deduction may be greater filing separately due to the 7.5% of adjusted gross income (AGI) threshold that must be reached before these expenses are deductible.
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Higher education expenses. Thanks to new legislation, many parents of college students again face a decision: Whether to take one of the two credits for higher education expenses or the tuition and fees deduction. The tuition and fees deduction, once expired, is now extended through 2020. To complicate matters, the credits and the deduction are all phased out based on different modified adjusted gross income (AGI) levels. Before you elect which tax benefit makes the most sense, you’ll need to evaluate all options.
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Investment interest. Investment interest expenses can be deducted up to the amount of net investment income for the year. This income does not usually include capital gains, because of favorable tax treatment of this type of gain. However, you can elect to include capital gains in order to help you deduct your interest expense. You can even cherry-pick which capital gains to use for this deduction. If you take this election you forego the favorable tax rate for long-term gains.
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Installment sales. If you sell real estate or other assets in installments over two or more years, the tax liability is spread over the years that payments are received. Because of this, you might be able to postpone the tax due. This technique can reduce the total tax paid depending on your effective tax rate each year. However, you can also elect out of installment sale treatment by paying the entire tax in the year of the sale. You might want to take this election if your income is lower in the year of the sale.
These election options may all seem confusing, but we can help. Give us a call at our office and we can help you choose the elections that are most beneficial to your particular circumstances.