ABC Tax & Bookkeeping - Services


Cutting Your Taxes	Itemized Deductions	Record Keeping	Homeowners	Seniors
CUTTING YOUR TAXES If you are like most taxpayers there are probably several things you can do to legally reduce the taxes you pay. Outlined below are 10 Tax$aver tips you may be able to use to reduce your tax burden. Tax$aver Tips Tax Deferred Savings Leverage Home Equity Shift Income Shift Expenses Tax Exempt Savings Passing Income to Dependents Non-Cash Contributions Tax Credits Capital Gains/Dividends Management Using Business Expenses The list is by no means complete. It is best to set up an appointment to review your situation. Tax$aver Tip #1: Maximize Tax Deferred Retirement Savings Alternatives There are numerous savings vehicles that defer paying income taxes until funds are withdrawn. The primary vehicles are Individual Retirement Accounts (IRAs) and 401(k) or 403(b) retirement savings plans. With these programs you can invest some of your income into a savings plan without paying income tax. You pay the tax when the funds are withdrawn. The key benefit: Your investment earnings compound over the years on a larger (pre-tax) dollar base. In addition, many employers also match your contributions in 401(k) and 403(b) plans. Tax$aver Alert: Tax legislation raises the annual amounts one may invest in IRA and 401(k) type plans each year. For instance, the once static per person traditional IRA contribution of $2,000 is now $5,000 with an additional $1,000 if you're over the age of 50. Since these programs' annual tax deferred contribution limits now change it is important to check the program each year and adjust your contributions accordingly. Tax$aver Tip #2: Utilize Home Equity Loans Versus Other Loan Types The interest on most home mortgages is fully deductible. In addition, you can leverage the equity in your home via a home equity loan, use the funds for other purposes and still deduct the interest expense. *Example:* You live in a home with a market value of $150,000. Your outstanding loan balance is $60,000. Benefit #1: The interest on the home loan of $60,000 is tax deductible as an itemized deduction. Benefit #2: You can take out a home equity loan on the $90,000 you own of your home ($150,000 home value minus $60,000 remaining mortgage). The interest on this new loan is generally tax deductible. Cautions: There are upper limits to the loan interest deductibility for home equity loans and mortgages. But the deductable amount of interest could be impacted by falling home values. In addition, home equity loans use your home as collateral. If you default, you could lose your home. Tax$aver Tip #3: Shift Income In its effort to shift the tax burden to the more affluent, the tax code establishes tax brackets that increase as more income is earned. There are six brackets ranging from 10% to 35%. Once you reach the next threshold, each additional dollar you earn is taxed at the higher rate (this is called your marginal tax rate). Knowing your income relative to the next "jump" in tax bracket can be beneficial. Where possible, it might make sense to shift income from one year to the next or file separately versus jointly to stay in a lower tax rate bracket. Some ideas: Defer a bonus until the following year. Defer invoices and work if self-employed. Use tax-exempt savings instruments if the interest income is taxed at a higher rate. Defer the wedding until the next calendar year. Conduct tax forecasts for different filing options. Tax$aver Tip #4: Shift Deductions/Expenses Another common way to lower taxes is to shift controllable expenses into the year they will benefit you the most. *Example:* Make a thirteenth house payment in a year with atypically high income. This will give you an additional amount of interest and property taxes to use as an itemized deduction. While this shift can only be done once, the impact on that year's taxes can be significant. Other ideas: Time medical expenses in years that they may go over 7.5% of your income. Make higher charitable contributions in years they will benefit most. Pre-pay estimated state, city or county taxes. Tax$aver Tip #5: Explore Tax Exempt Savings and Investments Municipal bonds are the primary vehicle available to avoid paying federal taxes on the interest earned. In many cases state taxes too may be avoided if the bonds are issued from your state. It is important to calculate the after tax yield of other savings and investment vehicles and compare them to the traditionally lower rate of return on municipal bonds. Other tax exempt savings options are College Savings Plans (529s), Coverdell Education Savings Accounts and Roth IRA's. Tax$aver Tip #6: Pass Income to Dependents Income earned by a child or dependent can be taxed at their rate versus your higher rate if handled correctly. This is especially useful if you are self-employed and you employ your child to do work for your business. You can also pass income to your children via a gift. But be careful, excess gift giving can be taxed. *Caution:* There is a "kiddie tax" formula that is in place to ensure excess income is not being deferred to a child. Make sure earned income (wages) versus unearned income (interest) is clearly tracked. Call for advice on whether gifting is a Tax$aver technique for you. Tax$aver Tip #7: Non-Cash Charitable Contributions How many times have you donated clothing or furnishings without keeping track of the items given? This often overlooked itemized deduction is a great way to reduce your tax burden. Even the mileage to and from the charitable location is deductible. Stock can make a better donation than donating cash. If done correctly, you can avoid paying a gain on appreciated stock, while taking full advantage of the increased market value of the stock as an itemized deduction! *Caution:* The rules for deducting donations of vehicles to charities have changed. If the charity sells your vehicle without using or improving the vehicle, your deduction is limited to the gross proceeds from the sale not what could be a higher fair market value. In addition, the quality of donated property must be in good or better condition. Tax$aver Tip #8: Take Full advantage of Tax Credits Some of the more common tax credits that can directly reduce your tax obligation are: Child Credit Child Care Credit Adoption Credit Earned Income Credit Disabled Credit Hope Credit Lifetime Learning Credit Qualified Retirement Savings Plan Credit Tax$aver Tip #9: Leverage Special Tax Rate on Capital Gains and Dividends The federal tax rate on dividends and long term capital gains are 15% through 2010 (from 2008 - 2010 wage earners in the 10-15% tax bracket pay 0% capital gains tax). Former tax rates were as high as 20% on long term capital gains and 38.6% on dividends. Look into corporate dividend paying stocks to reduce taxes. Time the sale of stocks to get the lowest tax rate. Avoid matching investment losses that can be used to reduce taxes on your income up to 35% with lower taxed capital gains tax rates. Tax$aver Tip #10: Combining Business and Vacations Expenses for trips taken primarily for business purposes can be deducted, even if some vacation time is spent while on the trip. Make sure the trip is primarily for business. Expenses that are clearly for vacation are not deductible. ITEMIZED DEDUCTIONS Itemized deductions are captured on Schedule A as an alternative to taking the standard allowable deduction. To determine which is more favorable for your situation, it is often best to calculate your return both ways. Generally, if you own your own home you will itemize deductions. To help you gather and retain the correct records, a checklist is provided here for your use. While the list is not all inclusive, it is a good starting point. Medical & Dental Costs Medical and Dental expenses are generally deductible to the extent they exceed 7.5% of your income. Some of the more common expenses: adoption birth control pills (prescribed)doctor/dentist fees drug/alcohol treatment guide dog costs handicap access devices for disabled hospital fees insurance premiums prescriptions laser eye surgery lead based paint removal cost life-care fees for medical treatment longterm care ins prem. meals/lodging related to hospital stays medical devices operations organ donation physician diet/health programs psychiatric care school and/or home for disabled smoking cessation program cost special life items (glasses, limbs, dentures, wheelchairs, hearing aids, contacts, etc.) transportation (medical related) weight loss programs cost Taxes The following taxes are generally 100% deductible. state/local taxes property taxes payments to mandatory state funds foreign income taxes real estate taxes value based auto license fee general state/local sales tax* * Through 2007, and potentially beyond, you may deduct either general state/local sales tax or state/local income tax. Since this provision is not yet permanent, it is a good idea to save receipts substiating major purchases involving sales tax. Interest Expense While most personal interest is no longer deductible (credit card interest, car loans, and the like), there are still interest expense deductions available to you. home mortgage interest 2nd home mortgage interest home equity loan interest interest on special assessments (as real estate tax) business interest investment interest "points" paid New! Mortgage loan insurance premiums covering mortgages purchased in 2007 and beyond Charitable Contributions (donating money or property) Both cash and property are generally deductible if donated to qualified organizations. Qualified organizations include: churches non-profit schools non-profit hospitals public parks boy & girl scouts war/veterans groups agencies such as: Red Cross, Salvation Army, Goodwill, CARE, United Way etc. YMCA/YWCA some environmental / conservation groups Tax$aver Tip: All cash donations now require a bank record or receipt. Tax$aver Tip: Make sure you also keep track of your mileage to and from the charity. It is also deductible. Tax$aver Tip: Only donate your vehicle to a qualified charity that uses, improves or sells the vehicle at full market value. If the charity sells your vehicle without using or improving the vehicle, your deduction is limited to the gross proceeds from the sale and not what could be a higher "fair market value". Caution: The rules for deducting donations of vehicles to charities have changed. If the charity sells your vehicle without using or improving the vehicle, your deduction is limited to the gross proceeds from the sale and not what could be a higher "fair market value". Casualty & Theft Losses Casualty and Theft losses are generally deductible to the extent they exceed 10% of your adjusted gross income, are not reimbursable via insurance, and each event exceeds $100. fire theft natural loss: tornado, hurricane, flood, etc. car accident vandalism other accidents Miscellaneous Deductions Most miscellaneous deductions are only deductible to the extent they exceed 2% of your adjusted gross income. Items with an "" are usually not subject to the income threshold. gambling losses to offset gains handicapped job related expenses* work uniforms un-recovered annuity costs* job hunting expenses safe deposit box cost tax prep fees employee business expenses hobby exp. to offset gains 50% of business related meals; entertainment classroom material expense for teachers repayments of income* repayments of Social Security investment related expenses in-home office expenses IRA/KEOGH administration fees business use depreciation certain legal fees trust administration fees job required medical exam job required education expenses Non-deductible Expenses The following are common non-deductible items: accidental damage blood donation\club dues commuting expenses cosmetic surgery drought losses estate/gift taxes funeral expenses gifts to foreign organizations gifts to "for profit" groups gifts to individuals home repairs labor union donations license fees life insurance prem. lost property non-essential education non-health related: household help health club dues PAC donations political donations property assessments raffle tickets sales taxes (unless in lieu of state income taxes) Soc. Sec./Medicare tax penalties termite/insect damage tickets and fines Tax Savings Tips Tax$aver Tip #1: Expense Shifting Whenever possible shift expenses into categories of itemized deductions to surpass the IRS thresholds in a given year. *Example:* You have surgery during the year resulting in high medical costs for that year. The IRS 7.5% of income threshold is surpassed, so every incremental Medical and Dental expense is now deductible. If possible, now is a good time to get eyes checked, to get family physicals, and to get other medical and dental work completed. Next year you will again have to reach the 7.5% threshold before you can deduct the expense. Tax$aver Tip #2: Miles, Miles, Miles Capture all your mileage for business travel, charitable travel, and medical travel. Keep a log book in your car and note the miles to and from the doctor or dentist. Track the miles to drop off charitable donations, or to go to and from your charity. This area of deductible expense is often not taken or is poorly captured. Tax$aver Tip #3: Missing a few things What is deductible? What is not? When in doubt save the canceled check, the proof of payment, and receipt. Without the proof, the expense cannot be taken. Tax$aver Tip #4: Non-cash donations How many times have you dropped off a bag of clothes or a lamp and not kept a record of the gift? All of these donations that are in good or better condition are deductible. Keep a list of items you plan to give away. Put the list next to or inside the bag of items you plan to drop off. The required itemization of items donated can be prepared when the bag is ready to be dropped off at your favorite charity. Tax$aver Tip #5: Donation Traps You must now have a bank statement, cancelled check or receipt for all cash donations. So, write checks to your church versus cash in the collection plate. Send in a check to the Salvation Army or favorite charity instead of putting cash in the kettle. Should you have any questions or concerns regarding your situation please call. RECORDKEEPING Imagine you've been selected by the IRS for an audit. Do you have the proper documentation to support your income and deductions? What does the IRS look for to validate your claimed income, deductions or tax credits? A little work now can mean little or no headaches later should you need to defend your return. Generally, you need to consider three things when defining the record keeping requirements for the Internal Revenue Service. What to Keep How Long to Keep Records What is Required as Proof What to Keep The requirements of what to keep vary depending on the area under review by the IRS. To assist you in keeping good records, a basic retention checklist is presented for your use. Key record keeping requirements for specific areas on the return are reviewed in "What is Required as Proof." *What to Keep Checklist* 1040 Tax Return All IRS supporting Schedules W-2s Canceled Checks Work Papers Bank Statements 1099s Invoices 1098s Cash/Other Receipts Record of purchase Investment Records and sale Record Log for Tips,Travel, Mileage Payroll Stubs Divorce Decree and related records Donation Acknowledgments Other Notes; proof of transaction Account Statements How Long To Keep Records Per the IRS, "You must keep your records as long as they are important for any federal tax law." Usually this means: 3 years from the date your return is filed OR 2 years from the date the tax is paid OR 6 years after the return is filed if income is under reported by more than 25% OR Indefinite, if you failed to file a return or the return is false or fraudulent The default date is the later of any of the above. *Helpful Hints:* If you file your return early (prior to April 15th) the IRS still uses April 15th as the filing date. If in doubt, keep all your 1040s and supporting schedules indefinitely. Exceptions Make sure you keep your return for a longer period of time for two reasons: Valuation of Property. You will need to keep returns AND supporting proof of expenses to determine the value of property you own and then later sell. Common examples are stocks and your home. Make sure all purchase and selling documents are retained. Keep track of all expenditures that add to the value of your property as they will be used to help reduce any potential capital gains when you sell. IRA and Retirement plan information. Keep all records relating to IRAs and any pre-tax contributions to retirement plans such as 401(k)s. This is especially important if you contributed some funds to your plan in after-tax dollars. When you take the funds out at a later date you will need to prove that you have already paid taxes on the funds. Keep these records until all the funds have been distributed. What is Required As Proof You've kept your records for the right time frame, but the IRS says you must prove your claimed deductions. The trick here is that "PROOF" has a sliding definition depending upon what is being reviewed. *The Basics* Generally, proof of payment is a canceled check or cash receipt. If neither is available, an account statement is often acceptable. To be adequate proof the following must be clearly shown: Amount Date of Payment Who the Payment was made to (payee) Purpose of Payment *Specific Retention Requirements* Adoption: Bills, canceled checks, legal agreements, receipts Child Care: Bills, canceled checks, statement from child care provider Medical & Dental: Bills, canceled checks, statements, receipts, mileage log Mileage Log: Date, miles driven, to/from destinations, purpose, PLUS; expenses for tolls, parking fees, taxi and bus fares Interest: Statements, notes, canceled checks, Form 1098 (mortgage) or Form 1099 (interest and dividends) Taxes: Form W-2, canceled checks, statements Miscellaneous: Receipts, canceled checks, statements Charitable Contributions: Cash Donation Amount - Required Proof less than $250 - Canceled Check and Receipt from Charity or bank statement more than $250 - Same as above PLUS charity acknowledgment or payroll records Donation of Property (in good or better condition) Amount - Required Proof less than $250 Receipt from charity with date; location; name; and property description PLUS written record of each item donated $250-$500 Above PLUS acknowledgment from the charity $500-5000 All of the above PLUS additional records PLUS file Form 8283 $5001+ All the above PLUS substantiation Vehicles: Statements from charity (Form 1098C or equivalent) that shows the value of your donation. Common Questions & Answers Q. When is a credit card transaction deemed tax deductible? When the transaction is made or when you pay the credit card bill? What proof is required? Credit card transactions are tax deductible when the transaction is made. Example: You make a contribution to the Boy Scouts using a credit card on December 31st. You pay the credit card bill on January 15th. The contribution can be deducted in the year the transaction was conducted, not when the credit card bill was paid. Your credit card statement is then used as proof of the transaction along with any receipts. Q. My bank does not return canceled checks, can the duplicate copy be used? Yes, but only in conjunction with the bank statement showing the checks clearing. You may also use a copy of a paid invoice or statement. In a pinch, often you can get copies of canceled checks from your bank for a fee. Q. Should I keep track of non-payroll deposits in my savings account? Yes! If you are audited, the IRS will often look into your bank accounts and ask for explanations of any deposits over and above your claimed income. Often these deposits are gifts, reimbursements for employee expenses or simply transfers between accounts. HOMEOWNERS Homeowners have been on a wild ride the past year or so, with foreclosures, falling home values, and a variety of new tax laws. How can you get the maximum financial benefit from your home? When Buying A Home What can you do to ensure your "Dream Home" is not the next one on the lender's foreclosure list? Use the lender's general rules when determining whether you can afford a particular home. One: Do not purchase a home valued at more than 21/2 times your annual income. Two: Assume you can afford to pay no more than 28% of your income on your mortgage's principle, interest, property taxes and insurance combined. Three: Make sure your total debt is not more than 36% of your income. Tax$aver Tip: Never sign up for a mortgage you don't understand. Negative amortization mortgages and variable rate mortgages may be good for some, but are often the cause of financial hardship. Tax$aver Tip: Negotiate. Many lender fees are negotiable, even the rate of interest. What Is Deductible The deductibility of homeowner expenses is a significant area of tax savings. Mortgage Loan Interest - Interest on your main home and a second home are generally deductible as an itemized deduction. The qualified loan(s) can be first and second mortgages, home improvement loans or a home equity loan. Mortgage Costs - Costs paid in advance as "points" and loan origination fees at closing are deductible. Deductible "points" are paid for you by the seller at closing when you buy your home. Tax$aver Tip: You must lower the base price of the home by seller paid points to compute the capital gain on the home when you sell. Refinancing "Points" - Points paid during refinancing can be deductible, but must be spread out in equal amounts over the life of the new loan. Real Estate Taxes - Property taxes paid on your main and second homes are deductible as an itemized deduction. Assessments for maintenance or repair Mortgage loan insurance premiums for new policies taken out in 2007 - Premiums you pay for "qualified mortgage insurance" in connection with home acquisition debt are deductible as an itemized deduction. Other limits and qualifications apply. What Isn't Deductible Lender imposed closing charges - Charges related to the mortgage loan but not loan interest are generally not deductible. These include appraisal fees, notary fees, preparation and loan registration fees. Seller paid "points" - The seller may not deduct "points" paid on behalf of the buyer. Homeowners insurance - These insurance premiums are not deductible even if the payments are escrowed as part of your monthly loan payment. State and community charges - Charges for services such as water and sewer. Assessments that improve your property - State and local assessments such as sidewalks are generally not deductible. Pre 2007 Home mortgage insurance premiums When You Sell When you sell your home you may be able to exclude up to $500,000 (married couples) or $250,000 (single person) of your gain when selling your house. This tax-free gain can be used once every two years for your primary residence. To compute the gain you must subtract your home basis (the purchase price of your home plus any home improvements) from the adjusted selling price. When computing this gain you must also account for any gain rollovers from prior home sales under the old tax law. To qualify for the gain exclusion you must also meet a two-year out of the last five residency requirement. But even this qualification has some exceptions if you were required to move due to a change in job or other unforeseen circumstances. Tax$aver Tip: Use the home gain tax exclusion as a tax planning idea if you are willing to move. Home Improvements Should you track them? All qualified home improvements can be added to your home's value to reduce the possible gain. The need to track home improvements has diminished with the ability to exclude from tax up to $500,000 of the gain when you sell your home. However, it is recommended you keep good records if: You have a home office Your house is located in a high demand area You plan to stay in your home for a long time The tax laws change You rent out your house You make major improvements Your home is no longer your primary residence What is an improvement? Home improvements add to your home's value (basis), like: adding a room, finishing an unfinished basement, adding a new roof, or paving your driveway. Home repair/maintenance items do not add to your home's value (painting, wallpapering, etc). However, these expenses can be used as an improvement if done in conjunction with a remodeling project. Home Office A home office deduction is available to you if: It is the principal place for your business It is where your patients, clients, or customers meet with you in the normal course of business. It is an area of the home that is used exclusively and on a regular basis for business It is used as a convenience to your employer You are using an area in your home as the sole place for storing products used in your business You use a place in your home to conduct the administrative or management activities of your trade or business, provided there is no other fixed location for such activities You are limited to home office deductions equal to but not greater than the gross income of the business less non-home-use business activity expenses. The allocation of the home use expenses on a proportionate share cannot create or increase a net loss in the business. Vacation Home Rental Your vacation home is another potential source for tax savings. Briefly, the rules are: If you do not rent out your vacation home you can deduct mortgage interest and real estate taxes. If you rent out your vacation home for 14 days or less you can deduct the mortgage interest and the real estate taxes. The rental income is tax-free. If you rent out the home 100% of the time and there is no personal use, generally you may deduct interest, taxes, all operating expenses, depreciation and rental losses up to $25,000. If you rent out your vacation home for more than 14 days, the rules regarding personal use and what you can deduct are very complex. Foreclosure With uncertainty in the housing market and the dramatic increase in foreclosures what can you do if you are worried about this happening to you? Talk to the lender. Often the lender will develop a work out program. They may defer the upcoming bump in your variable loan interest rate or develop an alternative payment schedule. Convert your exotic mortgage to a conventional mortgage before trouble hits. Look for new tax legislation. There are pending provisions in Congress to give tax breaks to those being foreclosed upon. If you must go through a foreclosure be careful. If the debt wiped out exceeds your home's value the excess can be seen by the IRS as taxable income. If this happens to you make sure to call for a consultation as the IRS now has debt forgiveness programs. SENIORS You have been saving your entire working life for retirement. You may have a pension, personal savings, a retirement plan and are planning on Social Security income. What can you do to ensure you get the maximum benefit with as little tax bite as possible? To ensure your "Golden Years" are truly golden this Tax$avers brochure discusses some common topics that can save you money; Social Security Retirement Plans Estate Plans Tax Code Benefits for Seniors Social Security Started in 1935, Social Security was built to provide a safety net for workers during retirement years. Today, 16% of Americans currently receive Social Security benefits. An estimated 90% of Americans rely on Social Security as their sole means of retirement income. Do I qualify? Yes, if you paid into the fund for forty calendar quarters (equals 40 credits). Yes, if you: are 62 or older are a survivor of a deceased worker have a qualified disability To receive benefits you must apply by calling 1 (800) 772-1213 or go to the administration web site: www.ssa.gov. The Social Security payments do not commence automatically. How much do I get? Your benefit amount will change depending on your age when you apply to receive Social Security benefits, your annual earnings prior to retirement, the amounts you contributed to the account, and whether you receive other income. Tax$aver Tips: Periodically check with Social Security to ensure your earnings history is correct. If errors are not corrected timely, you may lose your ability to correct them. Conduct an analysis to determine when it is best to start receiving benefits for your situation. The longer you can wait after age 62, the greater the monthly payment may be to you. If you are age 62 to 64 and you are currently receiving Social Security benefits, make sure to track your other income. If your earningsexceed the limit for your age, your social security benefits can be reduced. Look into direct deposit. The Social Security direct deposit program is a safe, quick alternative to receiving a check in the mail. Look into withholding tax options. If you owe taxes or need to pay quarterly estimated taxes you may want taxes to be withheld from your social security checks. Please call if you would like assistance in estimating your benefits. Retirement Plans If you have alternative savings resources ready for your retirement years, make sure you review their status to ensure you maximize their benefits. Pension programs If your company is providing you with a pension plan, make sure you are receiving an annual review of the plan. It should tell you; The pay-out value of the pension The amount you are vested in the program The funding status of the plan Tax$aver Tips: Assess the stability of the plan. With recent business mergers, bankruptcy's and less than full funding of pension plans by some companies, the certainty of payment may not be as certain as you think. Your plan may offer you a one-time "lump sum" pay-out. Make sure you conduct an analysis to determine which option is best for you. 401 (k)s, IRAs, and similar programs You may have taken advantage of the opportunity to contribute pre-tax earnings to a savings plan like a 401(k) or an IRA. If you have not yet retired, these savings alternatives are often the best tax bet in town. Why? Pre-tax contributions provide more savings available for compound interest growth. Employers often match a percentage of your contribution. Income taxes are deferred for years, until the funds are distributed to you. Investment alternatives are usually vast. If you are currently in a plan, it is best to review the alternatives available for fund distribution to minimize the potential tax bite. Some items to consider: Withdrawals prior to age 59 1/2 could be subject to a 10% tax penalty. You must begin withdrawals at age 70 1/2. Withdrawals are treated as ordinary income in the year they are withdrawn. Tax$aver Tips: Keep good records of your after tax contributions to any savings plan or IRA. You will need to prove to the IRS that you have already paid income taxes on this income. Congress has also lowered the minimum annual withdrawal requirement to enable your funds to grow tax deferred for a longer period. Review the investment mix of your retirement plan funds annually. The level of risk you were willing to take in your 30s or 40s may not be appropriate for your situation today. Review your deposit amounts annually. You may be eligible for a plan this year that you were not eligible for last year. Program changes may allow you to increase your deposits. Tax legislation allows increased annual contribution to retirement savings plans for those 50 or over: IRAs: Add $1,000 in 2008 and beyond. 401(k) and 403(b): Add $5,000 in 2008 and beyond. SIMPLE Plans: Add $2,500 in 2008. Gains of up to $500,000 ($250,000 if single) on the sale of your personal residence may be exempt from capital gains tax. Consider moving to a lower cost home to convert your home equity to cash, thereby enhancing your retirement plan. Roth IRAs: The Roth IRA allows you and your spouse to contribute funds into an account on an after tax basis. If you keep the funds in the account for five years the earnings are tax-free. With a few exceptions, there is a tax and a 10% penalty if the funds are withdrawn prior to age 59 1/2. Unlike Traditional IRAs, with a Roth IRA you may make contributions after age 70 1/2 and there are no mandatory minimum withdrawal requirements. Estate Plans One of the biggest potential tax risks to you may be on the assets you wish to leave to your loved ones. The size of your estate generally determines the complexity of the estate planning you must do: Estates worth under $2,000,000 Estate taxes are not levied on estates valued below a certain amount which the government sets periodically. Each person/spouse should have a simple will. Assets should be held jointly. Estates over $2,000,000 (approx.) - can be substantially more complex to minimize estate taxes as high as 45%. You are best served to develop an estate plan that may include any or all of the following: A variety of trusts. Separate ownership of various assets. A gift giving strategy to transfer ownership of some assets. Setting up a variety of plans with legal,insurance, financial and tax professionals. Tax Code Benefits for Senior Taxpayers The tax code has been written to provide some benefits to you after you reach retirement age. Some of the more important provisions are: Elderly Tax Credit for those 65 and over. Additional standard deduction for those over 65. Deductions for pre-paid non-refundable medical and retirement home care expenses. Deductible long term care insurance expenses. Medicare. While not a direct part of the tax code, this program provides subsidized health care that effectively allows for deductibility of these expenses. As an employee you have paid 1.45% of your pay to help fund the hospitalization portion of this coverage. At age 65 you can enroll in the medical portion of the program. Medicare prescription drug benefit plan. Special added incentive to participate in IRAs. Special retirement plan savings credits. With senior taxpayer status, you have many tax and financial planning topics to review. By planning properly you can ensure that your "Golden Years" can be truly golden.