More On Tax Planningfrom The Advisor's Professional Library
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
- Precious Metal Taxation Precious metals can be used to better diversify a portfolio but can be volatile. The tax implications of investing in these types of assets vary depending upon the situation.
Women have made great advances at home and in the workplace over the last few decades, yet their struggle to achieve economic parity with men continues–even at tax time.
“For a woman, considerations of her compensation expand to touch on many aspects of her family life, which is all the more reason to be concerned when we know that a woman is still paid 70 cents for every dollar by a man,” said Aditi Mohapatra, a senior sustainability analyst at Calvert Investments, in a phone interview on Monday with AdvisorOne.
At tax time, that means women must educate themselves about how to find every credit and deduction that can help them stretch their income, according to Peggy Cabaniss, president of HC Financial Advisors, based in Lafayette, Calif.
“My advice to women with regard to taxes is that they understand not only their own tax return but that of their spouse,” says Cabaniss, who has worked for more than 25 years as an investment advisor and financial planner.
“I don’t ever want a woman to sign a tax return without knowing what the numbers are and where they come from,” Cabaniss says. “There have been way too many cases in the past where the man gets the tax return done, brings it home, and says, ‘Here, honey, sign here.’ I’ve met innumerable women who simply have no idea of what they signed or why.”
Fear prevents women from understanding what makes up a tax return, Cabaniss says, adding that the best way advisors can help their women clients fight fear is to give them a basic education on what the Internal Revenue Service expects to see when a tax return gets filed.
Tax returns are simpler than they seem, she says. So while a completed tax return may total as many as 50 pages, there are just five pages on an individual 1040 IRS tax form that Cabaniss considers really important:
- Page 1, the statement of income, which includes salaries, IRA distributions and dividends. The bottom of this page totals up adjusted gross income.
- Page 2, the summary of deductions as well as any credits a taxpayer is entitled to. Subtracting deductions and credits from AGI results in an item called taxable income, “and that’s where your accountant looks up on a tax table to see how much tax is due,” Cabaniss says.
- Schedule A, the “itemized deductions” page. This sums up interest deduction on a home mortgage, property tax, charitable contributions and medical expenses above a certain level including long-term-care insurance. Note: This total also is listed on Page 2.
- Schedule B, the “interest and ordinary dividends” page. This totals income from investments such as CDs, stock dividends and bond interest. Note: This total also is listed on Page 1.
- Schedule D, “capital gains and losses.” This form–one of the most complicated schedules in the IRS’ broad array of schedules–indicates whether the taxpayer must pay taxes on long-term and short-term gains from the sales of assets. Sales on losses listed here reduce taxable income. Note: The summary of gains or losses can be found on Page 1.
“Knowledge helps makes you a better taxpayer,” Cabaniss says. “When it comes down to it, it’s not really a 50-page return. People should understand those five important pages. Then when they sign their tax return, they know the numbers that were filled in by the tax preparer are correct and they don’t need to be afraid and blindly doing what people tell them. Women need to understand, especially if someone else came up with the numbers, how they came up with them.”
How Women Can Bring Home More Bacon
For women in the workplace, a few tax credits and deductions can make a big difference in how much money they take home, according to Barbara Kogen, a lawyer and certified public accountant at Miller, Kaplan, Arase & Co., a Los Angeles area accounting firm.
“In this changing economy, people are looking for new positions and going back to work, and there are a few items that are especially pertinent to women, because even if we have full-time jobs, women are still looked on as the primary caretaker of family and kids,” says Kogen (above).
She notes that taxpayers should keep an eye out for tax credits even more than deductions: credits offer a dollar-for-dollar benefit versus deductions, which offer only a fraction of that. “This applies to any credit I’m talking about,” Kogen says. “A credit is much more valuable than a tax deduction.”
For example, for a taxpayer in the 20% tax bracket, a $1,000 deductible item will save her only $200 in taxes. But with a $1,000 credit, the dollar-for-dollar benefit means a savings of $1,000 in taxes.
For higher income earners, the downside of credits is that a phase-out will kick in once adjusted gross income reaches a certain level, Kogen notes.
“They generally tend not to get the full benefit of any of these credits,” she says. “There are often percentage limitations, so you can deduct items only if you exceed a certain amount, so that’s why it’s important to accumulate everything you can. Still, every little bit helps.”
More tax tips for women from Kogen include:
1) The IRS’ often overlooked tax credit for child care and dependent care. This applies to the cost of care for a qualified child under the age of 13 or for adult relatives, such as an aging parent living with the taxpayer, who can’t physically or mentally take care of themselves. The credit is a maximum of $1,050 for one dependent and $2,100 for two or more dependents. There is a phase-out based on adjustable gross income, starting at $75,000 for single women and $110,000 for those who are married and filing a joint return.
2) The child tax credit. This $1,000 child credit applies through 2012 for kids under 17. For married taxpayers filing a joint return, the phase-out begins at $110,000.
3) The adoption credit. This refundable credit covers all expenses directly related to a legal adoption, including adoption fees, court costs and attorney fees. The maximum allowed equals $13,360, and the credit is a direct offset for the taxpayer. The AGI phase-out starts at $185,000.
4) Deductions for tuition as well as interest on higher education student loans. These are “above the line deductions” that actually reduce adjusted gross income. “You start with all of your income, then items are deducted to get you to your AGI. So student loan interest is great because the lower you can make your AGI go, the better the chance you will not be limited in another area, like the child dependent care credit or the adoption credit.”
5) And finally, here’s a boon for working moms. “Another exciting thing that definitely benefits new mothers started in 2011, when the Internal Revenue Service finally agreed that the rental expense for breast pumps and all other related costs for supplies are now deductible medical expenses,” Kogen says. “It created a big brouhaha because prior to that, they weren’t considered a deductible cost, and these things can get quite pricey.”
See AdvisorOne’s Special Report, 22 Days of Tax Planning Advice for 2012, throughout the month of March.
Read The Gender Trap in Investment Advisor's March edition.