If you are talking about tax deductions, the richer you are, the better it is for you. The middle class people of America have some tax breaks in their kitty like those of wealthy class on items like capital gains on the investments of retirement, home loans, and donations for charity. But, the wealthy take the pleasure of these deductions to a highly disproportionate extent, if they are seen in comparison with other taxpayers.
As per the reports of National Priorities Project, the top earners of America got an average tax deduction of $66,384 in the year 2011, and the bottom 20% people made average savings on taxes of $107. Let us go through some of these tax breaks enjoyed by the rich. You can also take the help of qualified tax preparers of BHATIA & CO, INC, CPAs in SANTA CLARA, CA to understand these tax breaks.
Exclusion of gain from home sale
A bachelor selling a property (residence) does not have to pay any federal income tax for a gain up to $250,000. Similarly, a married couple filing joint tax can get the gain excluded up to $500,000. However, in order to take advantage of this lucrative break, you need to pass some tests:
· Ownership test: The property must have been under your ownership for minimum two years out of the five year phase ending on the date of sale.
· User test: The property must have been used as the principal residence for a minimum period of two years out of the same period of five years.
· $500,000 exclusion test of joint filers: In order to become eligible for $500,000 exclusion with joint filing, at least one of the spouses has to go through the ownership test. In addition, both the spouses have to clear the user test.
· Previous sale test: In case you have excluded profit from the sale of a previous principal residence, you have to wait for minimum two years prior to taking benefit of this profit exclusion deal once again.
Privilege of Roth IRA conversion
The tax preparers in SANTA CLARA, CA propose that if you have converted the conventional IRA into Roth account, it is considered as a taxable distribution, as the money goes from the traditional account into the Roth account. Thus, this conversion invites a larger federal income tax from Uncle Sam or may be a larger state income tax bill as well. But, there are two positive factors, which outweigh the bigger taxes.
· If you have attained the age of 59.5 years, you can withdraw all the gains and incomes which are accumulated in Roth account, free of federal income tax, till the time you have had minimum one Roth IRA account open for over five years. In case, the rates of federal income tax rise in future, your Roth IRA balance remains blissfully unaffected. If you pass away, your heirs can use your Roth account and that too without paying federal income tax till the time the account had been operational for over five years.
· Your Roth IRA account is exempted from the RMD (required minimum distribution) rules, which apply to the retirement accounts favored by tax. Under the rules of IRA, you can begin procuring annual withdrawals once you attain the age of 70.5 years and pay the consequent taxes. However, you can leave the balance of Roth IRA untouched for a longer period of time as you want and continue to earn gains and income free of federal income tax. You can also take the advice of the professionals from the BHATIA & CO, INC, CPAs.
Contributions in self employed retirement programs are deductible
For instance, this benefit encompasses solo 401(k) plans, solo defined benefit pension plans, SEP (simplified employee pension) accounts, etc. Considering your age and the type of plan you have taken, you can put in and deduct an amount of $57,500 and more if you take a defined benefit pension plan, in the tax year, 2014. Do refer to the advice of tax preparers in SANTA CLARA, CA in this case.
Alimony deduction
If you have paid alimony payments to your ex-spouse, you can claim deduction on Form 1040, despite the fact that you are a high income earner. Divorce can also give you a tax break.
The tax preparers in SANTA CLARA, CA from BHATIA & CO, INC, CPAs state that if your company gives a plan of educational assistance under “Section 127”, you are eligible to receive an amount of up to $5,250 in reimbursements. These are tax free for eligible education expenses and do not require to be related to work and can encompass the costs of graduate schools.
In case, your company does not propose the plan of Section 127, you can obtain indefinite reimbursements that are free of taxes, for education to improve or maintain your performance at your present job.
BHATIA & CO, INC, CPAs