Tax Records - Suze Orman : Personal Financial Guru : Can I Afford

SUZE ORMANThe Ultimate Protection Portfolio™

Tax Records

This product provides information and general advice about the law. But laws and procedures change frequently, and they can be interpreted differently by different people. For specific advice geared to your specific situation, consult an expert. No book, software, or other published material is a substitute for personalized advice from a knowledgeable lawyer licensed to practice law in your state.

HAY HOUSE, INC.Carlsbad, California • New York City

London • Sydney • Johannesburg Vancouver • Hong Kong

Copyright © 2003 by Suze Orman Media, Inc. All rights reserved.Suze Orman® is a registered trademark of Suze Orman.Suze Orman—The Ultimate Protection Portfolio™ is a trademark of Suze Orman.People First, Then Money, Then Things® is a registered trademark of Suze Orman. Published and distributed in the United States by Hay House, Inc., P.O. Box 5100, Carlsbad, CA 92018-5100 • Phone: (760) 431-7695 or (800) 654-5126 • Fax: (760) 431-6948 or (800) 650-5115 • www.hayhouse.com®

All rights reserved. No part of this guidebook may be reproduced by any mechan-ical, photographic, or electronic process, or in the form of a phonographic recording; nor may it be stored in a retrieval system, transmitted, or otherwise be copied for public or private use—other than for “fair use” as brief quotations embodied in articles and reviews without prior written permission of the publisher. The author of this guidebook does not dispense legal advice. The intent of the author is only to offer information of a general nature. In the event you use any of the information in this guidebook for yourself, which is your constitutional right, the author and the publisher assume no responsibility for your actions.

ISBN 13: 978-1-4019-0345-9ISBN 1-4019-0345-2

16 15 14 13 12 11 10 9 8 71st printing, November 2003

7th printing, March 2016

Please locate and store the documents listed in the “Tax Records Checklist” below and file each document in your Protection Portfolio.

If you have a complicated tax return, you may find that the Protection Portfolio doesn’t have adequate space to house your complete tax return. If this is the case, please make photocopies of only the IRS tax return forms that you submitted to the IRS for each of the last three tax years and place those copies in your Protection Portfolio. Store complete tax returns, along with all supporting documentation, in another secure location. If you

q Tax returns for each of the last three years

q Supporting documentation of income and expenses for the last three years

TAX RECORDS CHECKLIST

Tax Records

S u z e O r m a n — T h e u l T i m a T e P r O T e c T i O n P O r T f O l i O ™2

do place your tax returns in a location other than the Protec-tion Portfolio, attach a note to the Portfolio tax file, explaining where the complete tax returns are stored, both as a reminder to yourself and as a convenience to family members.

Taxes and the Road to Wealth

Whenever I ask people, “What’s the one thing you have the hardest time with when it comes to your money?” a surprising number answer, “Taxes.” No matter how inevitable it is for us to complete our taxes, it’s also incredibly stressful. Yet I want to offer you a reason to relax a bit and take your taxes—and the job of computing your taxes—in stride. In the end, the amount you pay in taxes is simply one mea-sure of the amount of wealth you’re creating for yourself and your loved ones. If you end up paying more in taxes than the next person, it means that you’ve earned more and will also get to keep more. And that’s one more step forward on the road to wealth. With that in mind, figuring out your taxes—including getting the help of a tax accountant if you need it—and paying them with a grateful heart is the way to go.

Make the Most of Tax Deductions To help you (and your accountant), your Protection Portfo-lio comes with a Tax Deductible Receipts and Documentation folder. During the year, simply slip the receipts or documen-tation into the folder so that at tax time you’ll already have gathered all the paperwork necessary to complete your return. Inside the folder, you’ll find a card that lists the tax-deduct-ible categories of receipts and documentation that you should collect:

• Donations to charities

• Medical and dental expenses

• Investment expenses

• All nonreimbursed employee business expenses, including travel and entertainment

• Higher education expenses

• Real-estate expenses

• Tax-preparation fees

Common Questions about Tax Deductions

Following are the most common questions people have about tax deductions and the required documentation. What type of documentation must I keep for deductible expenses? Let’s deal with donations first. All cash donations to charity, regardless of the amount, must be substantiated by a cancelled check, bank record, or detailed receipt from the char-ity. If your donation is more than $250, you must also have a written statement from the qualified organization to which you made the donation. For other expenses, acceptable documentation includes sales slips, paid bills, invoices, receipts, deposit slips, and can-celled checks. Please note that additional documentation is required for nonreimbursed employee business expenses for travel, entertainment, gifts, and the use of a car. In these cases, you should keep records that prove the time, place, business purpose, and business relationship related to those expenses.

T a x r e c O r d S 3


What is a donation to charity? According to the IRS, a charitable donation is “a donation or gift to, or for the use of, a qualified organization.” That being said, there are several dif-ferent types of donations:

• Noncash donation: Goods or property such as clothing, household items, toys, sporting equip-ment, furniture, tools, jewelry, and electronics fall under this category.

• Monetary donation: Cash, check, credit-card, debit-card, or even payroll deductions are counted as monetary donations. Technically, the IRS also considers out-of-pocket expenses a monetary donation.

• Mileage expense donation: If you incur any mile-age or other automobile expenses while driving for a qualified charity—or driving to make a noncash donation—you can deduct nonreim-bursed travel expenses that are related to the use of your vehicle. Deductible expenses include gas and oil, but don’t include general maintenance and repair of your vehicle, insurance, or the cost of tires.

The IRS allows you a few choices in how you track your deduction. The simplest way is take what the IRS calls the Standard Mileage Rate. The rate in 2016 is 14 cents per mile. You keep track of the number of miles you drive and multiply by 14 cents. For example if you drove 20 miles round-trip to Goodwill to drop off a donation, you’d multiply 20 by .14 to get $2.80, which is your


mileage expense deduction for this trip. If you decide to use the Standard Mileage Rate, you can also deduct any parking or toll expenses.

The other method is to actually track the specific travel and mileage expenses, such as gas, oil, tolls, and parking. Whatever method you select to track these expenses, make sure you keep good written records of your travel, includ-ing date, destination, purpose, miles driven, and the name of the charity.

One final note: IRS regulations state that you can deduct these travel expenses only “if there is no significant element of personal pleasure, rec-reation, or vacation” in the travel. So make sure the charity is the central focus in providing ser-vices for the trip. For example, if you drive your daughter’s scout troop to a weekend camping trip and you decide to camp out yourself and do some hiking on your own, you can’t deduct the cost of driving the girls. But if instead you stayed with the troop and assisted the leaders, even though you may have had a pleasurable time and may have even gone hiking with the kids, you can deduct your travel expenses.

• Out-of-pocket expense donation: If you paid for anything on behalf of a qualified charity, such as refreshments for a church youth group, you can deduct these nonreimbursed expenses. Some other examples of this type of donation might include travel expenses you weren’t reimbursed for when you attended a seminar as a representa-tive of a qualified organization, or the purchase

and laundering of a uniform you were required to wear to volunteer at a local soup kitchen. The rule is that the expenses must be directly con-nected to the service you provide—they can’t be expenses related to your own personal needs.

Similar to the mileage expense donation, IRS regulations state that you can deduct these expenses only “if there is no significant element of personal pleasure, recreation, or vacation.” So, let’s say you take the children in your church to an amusement park and you spend the day at the park and have a great time, and then you drive the kids back that night. In this scenario, the mileage expenses for your vehicle are deductible, but your amusement park fee is not.

• Property donation: This involves donating stocks, bonds, or mutual funds to a qualified charity. Depending on the length of time you’ve owned the property and the value of the property, the donation will fall under one of two categories: ordinary income property donation, or capital-gain property donation.

When you donate something that you’ve owned for less than 12 months, it’s an ordinary income property donation. This means that you’ll only be able to deduct your original cost basis, not the current fair market value of the property at the time of the donation. For exam-ple, let’s say you bought 100 shares of a stock at $20 per share, but just six months later, when the stock is now trading at $35 a share, you decide to donate the stock to a charitable organization.


You’ll only be able to deduct the original basis ($2,000) of the property, rather than its current market value ($3,500).

Capital-gain property donation involves donations of property that you’ve owned for more than 12 months. In this scenario, you get to deduct the entire fair market value of the dona-tion. Using the previous example, you’d now be able to claim the entire $3,500 current value of the stock as a deduction. Given this great advan-tage, I recommend trying to wait until you have passed the 12-month test before you donate any stock or mutual fund.

Note: If the fair market value of your prop-erty has decreased, it may not be to your advan-tage to donate the property. If this is the case, you should seek the advice of an accountant to see if you’re better off selling the property at a loss and deducting that loss from your taxes.

How much of the donation can I deduct? Typically, you can deduct the fair market value of the donations you make to any qualified organization. However, the donation can’t be designated for use by a specific individual. For example, you can’t donate $200 to your church and request that this money be given to a specific underprivileged child. Or, if you receive a benefit as a result of making the donation, you must subtract the value of the benefit from the donation to determine your deduction. So let’s say that you attend a charity fund-raiser and pay $250 to attend, but you receive a meal that’s worth $50. In that case, the amount of your charitable donation is $200. That said, if the value of your benefit is equal to or more than the donation, then you don’t receive any deduction on your taxes



for this purchase. So if you attend a charity auction and you purchase a painting for $200 and the painting is really worth $250, then you can’t take a deduction. What’s the fair market value of a donation? IRS guidelines state that “the fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.” The fair market value of donated goods is generally less than what you originally paid for them. There are no fixed formulas for determining the value of these goods, other than to know what similar goods are being bought and sold for at the time they’re donated. Say you donate a brand-new dress to Goodwill. Similar dresses are selling at a local consignment store for $20, but Goodwill only sells them for $10. The fair market value of the dress is $20, because that’s the amount similar goods are being bought and sold for. What items can’t be considered charitable donations? The following is a short list of items you can’t deduct as a charitable donation:

• A donation made to a specific person

• A donation to a nonqualified organization

• The portion of a donation from which you benefit

• The value of your time or services

• Your personal expenses

• Appraisal fees


There are many possible choices for you to consider when making a charitable donation. For more detailed information on the rules and regulations on charitable contributions, please download IRS Publication 526 at www.irs.gov. A link to the IRS Website is provided on the Must Have Documents Website. How do I choose a charitable organization to donate to? There are a number of organizations that have Websites with very thorough databases full of information on charities you may want to consider donating to. Two organizations that you might want to check out are Guide Star (www.guidestar.org) and Charity Navigator (www.charitynavigator.org). Links to both of these Websites can be found on the Must Have Documents Website. How do I know that the charitable organization I chose is “qualified”? If you’re unsure of whether or not an organization is qualified, refer to IRS Publication 78, “Search for Charities,” on the IRS Website (www.irs.gov). You may also want to visit the Better Business Bureau (BBB) Wise Giving Alliance Web-site at www.give.org. The BBB Wise Giving Alliance reports on national charitable organizations that are the subject of donor inquiries. The BBB Wise Giving Alliance offers guidance on making informed giving decisions through their charity evalu-ations and various “tips” publications. How do I deduct medical and dental expenses? In order to deduct medical and dental expenses, the expenses must exceed 10 percent of your adjusted gross income (AGI). For example, if your AGI is $50,000 and you paid $2,000 in medical and dental expenses, you won’t be able to deduct any of these expenses, because you haven’t exceeded 10% (or $5,000) of your AGI. But, if you had $6,000 in medical and dental expenses, then you’d be able to deduct $1,000 on your taxes, which is the amount of your expenses above 10 percent.

What investing expenses are deductible? Fees for managing investments, such as custodial fees and management fees, are deductible. Fees you pay a broker to collect taxable bond inter-est or stock dividends are deductible as well, as are fees that pass through to you from nonpublicly offered mutual funds, partnerships, or trusts. These deductions must be reduced by 2 percent of your adjusted gross income. For more information, please visit www.irs.gov and download IRS publication 550, “Investment Income and Expenses.” What are nonreimbursed employee expenses? You can deduct nonreimbursed employee expenses paid or incurred during your tax year if they’re required to carry out your busi-ness or to be an employee, and considered ordinary and nec-essary. Some examples of nonreimbursed employee expenses include:

• Depreciation on a computer or cellular phone your employer requires you to use

• Dues to professional societies or a chamber of commerce if membership helps your job

• Education that’s work related

• Tools and supplies, or a home office if used exclusively in your work

• Job-search expenses

• Legal fees, licenses, and regulatory fees related to your job

• Malpractice-insurance premiums


• Medical exams required by an employer

• Occupational taxes

• Passport for business trip

• Subscriptions to professional journals and trade magazines

• Union dues and expenses

• Work clothes and uniforms, if required and not suitable for everyday use

What higher education expenses are deductible? Generally, student-loan interest, tuition, student fees, books, supplies, and equipment required for enrollment or attendance are deductible—depending on your income and other qualifying factors. Beginning on page 32, you’ll find specific information about some of the education deductions and credits you may qualify for. For additional information on higher-education expenses deductions and/or education credits, please visit www.irs.gov and download the IRS publication 970, “Tax Benefits for Education.” What real-estate expenses are deductible? Real-estate expenses such as taxes, mortgage interest, and closing costs are typically deductible. For detailed information on deductible real-estate expenses, please visit www.irs.gov and download IRS publication 530, “Tax Information for First-Time Homeown-ers,” and publication 936, “Home-Mortgage Interest Deduc-tion.” How do I deduct tax-preparation expenses? You can gener-ally deduct tax-preparation expenses in the year that you pay


them. For example, if you paid $200 in 2016 to prepare your taxes, then the $200 can be applied to your 2016 tax return. Tax-preparation expenses include not just what you paid your accountant to prepare your taxes, but also tax software programs, tax publications, and fees to electronically file your taxes. What types of expenses are not deductible on my taxes? There are a number of expenses that many people think are deductible, when in fact they’re not. Following is a list of typi-cal expenses that aren’t deductible (for a complete list, please visit the IRS Website, www.irs.gov, and download a copy of IRS publication 529, “Miscellaneous Deductions”):

• Broker’s commissions on IRAs and investment property

• Burial or funeral expenses

• Commuting expenses

• Fines and penalties

• Health-spa expenses

• Hobby losses

• Home repairs, insurance, and rent

• Home-security systems

• Life-insurance premiums

• Losses from the sale of your home, furniture, or car


• Lost or misplaced cash or property

• Personal legal expenses

• Residential telephone lines

• Travel expenses for another individual

• Wristwatches

How Long to Keep Your Tax Returns

If your taxes are relatively simple, keep documentation for three years, which is how long the IRS has to audit you once you’ve filed. Keep your return, W-2 forms, 1099 forms, records of investment other income (rental income, for example), and records of tax deductions. If your returns are more complicated, keep documentation for seven years. If you claim capital gains or losses, if you have your own business or are self-employed, if you’ve inherited considerable sums of money, or if you’ve bought or sold a lot of property and if the IRS thinks you may not have not reported all your income, it can audit you as far back as six years. So to be on the safe side, keep seven years’ worth of returns and documentation. If the IRS suspects you of big-time cheating, it can audit you for any year it chooses. If, God forbid, you’ve actually com-mitted fraud, your papers won’t do you much good, but you probably ought to keep them.


How to Protect Yourself Against an Audit

If you make a serious mistake in calculating or document-ing your taxes—or even if the IRS just thinks you did—it can audit you. Nobody in her right mind wants to go through the worry, effort, and expense that an audit can entail. But it can be avoided—by taking most or all of the nine steps listed here:

1. Report all income for which you have received a tax statement (W-2, 1099-MISC, 1099-DIV, and/or 1099-INT), and make sure that there are no discrepancies between tax statements and your return.

2. Attach all required forms and supporting sched-ules to your return.

3. File on time.

4. Have a competent tax professional prepare or review your tax return.

5. Adjust your exemptions to avoid receiving large refunds.

6. Before applying for a home-office deduction, make sure you qualify. Don’t exaggerate working space or make aggressive home-repair deductions.

7. Avoid taking a deduction for donations that are out of line with the income you’ve reported. If you donate more than $500 worth of goods (not cash) to charities, fill out Form 8283.


8. Don’t round off to the nearest $50 or $100.

9. Be neat and legible. Even better, you or your accountant should use software; having a com-puter program handle your calculations and making sure all the correct documents are filled out greatly reduces the risks of any slip-ups.

Reducing Your Taxes Is a Year-Round Activity

There are a number of actions you can take throughout the year to minimize your taxes. In order to keep more of your hard- earned money and give less to Uncle Sam, read this list of my favorite tax tips.

• Tax Tip #1: Stop getting a tax refund. Many of you get a tax refund every year because you’ve been letting your employer withhold more money from your paycheck than is necessary, or you are over-paying your quarterly estimated taxes if you are self-employed. If you get a $3,000 tax refund, your monthly withholding was $250 more than it needed to be. Another way of looking at it: You gave the IRS an interest-free $3,000 loan. Why would you do that?

To make matters worse, when you get the $3,000 refund, many of you usually spend it on something like a vacation or clothes. Let’s say that rather than giving the IRS an extra $250 every month, you invest it for growth. If you invest that $3,000 a year for 40 years in a good mutual fund that averages a 6 percent rate of return, your investment will be worth nearly $500,000!


So if you’re getting a tax refund, I want you to adjust the exemptions on your withholdings on your W-4 form. You’re not to use the IRS as a savings account. Please put that into effect right now.

• Tax Tip #2: Start paying estimated taxes. If you’re self-employed, or retired and getting a pension check with your taxes withheld, you’re required to pay what’s known as estimated tax payments. With estimated taxes, you send in the tax money that you owe, in equal installments, four times a year: April 15, June 15, September 15, and Janu-ary 15.

The amount of money you send in for esti-mated tax payments is set by a formula. You’re going to owe either 100 percent of last year’s tax liability or 90 percent of what you’re going to owe this year.

• Tax Tip #3: Accelerate tax-deductible payments. Every penny that you can save in taxes makes a huge difference to your bottom line. One popular move is to accelerate tax-deductible payments you’ll owe next year into the current tax year. For example, if you make your Janu-ary 2017 mortgage payment in December 2016, you can claim the interest deduction on your 2016 tax return. This tip also includes charitable contributions. Do you know that if you charged your charitable contributions on your credit card in December 2015, you still get to take it off your 2015 tax return because it was charged in December 2015, even if you don’t pay the credit-


card bill until the end of January 2016? So, small accelerated payments add up to make a signifi-cant deduction on your taxes.

Accelerated payments can also make a huge difference on your taxes when you receive income. Let’s say you expect to receive a big year-end bonus or pension check. You might want to talk to the individual or company that will be sending you your check and ask if it’s possible for them to wait until January of next year to give you that income. By deferring that income until the next tax year, you don’t have to pay income taxes on it until the following year.

• Tax Tip #4: Make the most of your retirement

plans. One of the best ways I know for you to cut taxes is to take advantage of the different kinds of retirement plans that are out there so your money grows for you rather than the IRS. After all, each of us will one day have to live on the money we’ve saved rather than the money we’re earning. The time to start planning for that day is now.

If you don’t have credit-card debt and you’re signed up at work for a 401(k), 403(b), 457, or SIMPLE plan, please make sure you contribute the maximum amount allowable. If you haven’t signed up for your retirement plan, please do so now.

For detailed information about the various retirement plans that you may qualify for, please consult the “Retirement Records” booklet. If you’re self-employed or your place of employment doesn’t


offer a 401(k) or a similar plan, please read about the various retirement options open to you in the “Retirement Records” booklet and take the actions that are right for you.

If you do have credit-card debt, and if you’re eligible to invest in your 401(k), 403(b), 457, or SIMPLE plan, I want you to begin changing the way you contribute to your retirement plan based on whether or not your company matches your contribution and the interest rate on your credit card. Please consult the following chart.

• Tax Tip #5: Fund your IRA all year long. Most people wait until just before they file their taxes in April to contribute to their IRA for the previous calendar year. This is a mistake. For example, for the tax year 2016, if you qualify, you have the right to put up to $5,500 ($6,500 if you’re at least 50 years old) in your IRA in January 2016. If you pos-sibly can, you should put that money away at the beginning of the year rather than at the tax dead-line. If you invest your $5,500 in January 2016 and that money sits there, averaging a 6 percent annu-alized return, by the time April 15, 2017, comes along, you’ll have $450 more in the account. If you simply keep this up, you’ll have thousands of dol-lars more over the years you maintain this account.

If you don’t have $5,500 at the beginning of the year, start putting $458 (or whatever you can) each month into your IRA. Continue to do so for the next 25 years and you’ll still come out better than if you had waited to do it in one lump sum at each year’s end.


• Tax Tip #6: Recharacterize your IRA. When you leave your employer, or reach retirement age, the government allows you to roll your 401(k) account into a traditional IRA. Then, as long as you meet the income requirements, you can convert the traditional IRA to a Roth IRA. You’ll owe income tax on the money you convert to a Roth, but years down the line when you with-draw the money you won’t owe taxes. If you have many years until retirement, that can be a

HOW TO CONTRIBUTE TO YOUR 401(k) OR SIMILAR RETIREMENT PLAN IF YOU HAVE CREDIT-CARD DEBT

Your company doesn’t match your 401(k) contribution, and the interest rate on your credit card is higher than the return on your 401(k) plan

Stop contributing to your 401(k) plan, and take all of the money you would have been contributing toward that plan and use it to pay off your credit-card debt. After your debt is paid in full, you can then go back to contributing to your 401(k).

Your company does match your 401(k) contribution, and the interest rate on your credit card is higher than the return on your 401(k) plan

You should still con-tribute to your 401(k) plan up to the point of the match. After you’ve reached the maximum amount of money that your com-pany will match, then and only then should you stop contributing to your 401(k) and take that money and put it toward paying off your debt.

Your company does match your 401(k) contribution, and the interest rate on your credit card is lower than the return on your 401(k) plan

If you don’t mind having credit-card debt and you’re 40 years of age or younger, then you should continue to invest fully in your 401(k) plan, at least to the level of the match, and pay off your credit-card debt at the same time.


smart move; otherwise, if you leave the money in a traditional IRA, all your withdrawal—including all those years of gains—will be taxed. The money that you originally converted has to stay in the Roth account for five years, or until you’re 591⁄2 (whichever comes first), before you can withdraw it without taxes or penalties. But the earnings on the amount you convert can’t be withdrawn penalty-free until you turn 591⁄2 and have held the Roth for at least five years.

So let’s say that you’re 39 and you convert $50,000 from a traditional IRA to a Roth. That $50,000 has to stay in the Roth IRA for at least five years. But after five years, even though you’ll just be 44, you can withdraw all $50,000 without any taxes or penalties. The earnings on that $50,000, however, can’t be withdrawn without penalties or taxes until you’ve reached age 591⁄2 and you’ve held the account for more than five years. I want to stress that I am in no way suggesting you with-draw money prior to retirement! But it is impor-tant to understand the flexibility a Roth IRA can provide if your family finds itself dealing with a true emergency. Early withdrawals from a Roth IRA should be your absolute last resort.

If your Roth IRA has lost money after you converted it from a traditional IRA, as a tax strategy you may want to recharacterize your Roth IRA—meaning moving money that was converted to a Roth IRA back into a traditional IRA. Let’s say you convert your traditional IRA to a Roth IRA at the beginning of 2016. Over the course of the year, the account loses a significant


amount of value. To make matters worse, you’re going to be stuck paying taxes on the value of the traditional IRA at the time you converted. If you recharacterize your Roth back to a traditional IRA, you’ll avoid paying taxes on the amount that you originally converted.

Depending on how your Roth performs, once you recharacterize you also have an option to convert the money back again. This transfer is known as a reconversion. For example, say you converted a traditional IRA worth $100,000 into a Roth IRA in January 2016, but by October it’s only worth $50,000. If you leave things as they are, you’ll owe taxes on that $100,000 conver-sion. But if you recharacterize your Roth IRA within the allowable time, you won’t have to pay taxes for the year 2016 on $100,000. Now let’s say it’s November 2016 and your account is worth only $50,000. If you recharacterize on November 1, 2016, you’ll avoid paying taxes on that conversion. You then can recharacterize your traditional IRA again into a Roth IRA in January 2017. You’ll only be taxed on $50,000, and those taxes won’t be due until April 2018. By recharacterizing and then reconverting you would have saved paying tax on $50,000—a lot of money by anyone’s standards. Make sure that the company holding your converted IRA gives you the option of recharacterizing and recon-verting.

When you recharacterize, there are time restrictions that you need to be aware of. An IRA owner who converts a traditional IRA into


a Roth IRA and then recharacterizes it (that is, changes it back to a traditional IRA) may not reconvert the traditional IRA (change it to a Roth again) before the beginning of the next tax year or until the end of the 30-day period from the day the Roth IRA was recharacterized—whichever is later.

What I hope I’m making clear is that tim-ing is everything. In the year that you convert, watch the markets closely. If the market is down at the end of the year and your Roth has suf-fered a loss, you might want to recharacterize at the very end of the year back to your traditional IRA. It’s something that you need to really think about, because otherwise, if you’ve converted money to a Roth and the market is now down, you’re going to be paying ordinary income taxes on a sum of money that’s more than your cur-rent account value.

When you recharacterize your IRA, it’s not an all-or-nothing situation. If you have $50,000 that you want to convert from a traditional IRA to a Roth IRA, you don’t have to convert $50,000 all at once. You might want to convert $10,000 this year, $10,000 next year, $10,000 the year after, or whatever amount of money makes sense so that you don’t put yourself in an exorbitant tax bracket. Remember, when you convert money from a traditional IRA to a Roth IRA, it’s taxed to you as ordinary income—and there’s a huge difference between a $50,000 infusion of ordi-nary income and a $10,000 or $5,000 infusion. So sit down with a good tax advisor or use one


of the calculators available on the Internet and decide what’s best for you.

• Tax Tip #7: Don’t borrow from your 401(k). When you have a 401(k), it’s true that many employers will let you borrow up to 50 percent of the money you have in your plan (up to $50,000) to buy a house, pay off bills, or use toward other situations that qualify. But I want you to carefully consider all of the implications before borrowing from your 401(k).

The supposed upside when you borrow money from a 401(k) is that you have 5 years to pay back the money (rather than the 40 years it could take you by paying the minimum on some credit cards) so, presumably, you’ll be disciplined into getting out of debt more quickly. When you borrow money from your 401(k), it’s not con-sidered income by the U.S. government, so you don’t have taxes, and you don’t have penalties. In addition, all the payments—plus interest—get paid back to you. You’ll usually pay yourself about 2 percent above the prime rate, which is the basic interest rate set by the banks for their best customers.

The downside when you borrow money from your 401(k) is that you’re losing out on the growth potential of the money you plan to retire on. Let’s look at what a 401(k) loan can do to your retirement savings: Say you’re 35 years old, make $40,000 a year, and have a 401(k) balance of $20,000. You contribute $2,400—or 6 percent of your salary—per year, and your employer


match is $1,200. Assume that you get an annual return of 8 percent on your account. If you con-tinue saving at this rate until age 65, your retire-ment nest egg will be about $624,000. Now you decide to take a loan from your 401(k) to pay off your credit-card debt. You take out a $10,000 loan on your 401(k) with five years to repay it. But you can’t afford to continue making contri-butions while you’re repaying that loan. What happens? When you reach age 65, your account will be worth $458,673. That difference of roughly $127,000 in savings translates into a loss of $7,620 a year in retirement income, assuming a 6 percent return. That’s about $630 a month, which is quite a chunk of cash. So it’s a decision to be made cautiously and wisely.

Another potential downside is that if you happen to leave your job or get fired, the money you borrowed is due in one lump sum at that time. If you can’t pay it back, you’ll pay taxes on the money as if it were ordinary income. If you’re under the age of 591⁄2, you may also have to pay a 10 percent penalty on the amount you haven’t paid back. So if you’re thinking of taking out a loan and there’s a possibility that you may leave your current employer, you should reconsider.


• Tax Tip #8: Offset your capital gains. Do you currently have some investments that have lost value? And some investments that have signifi-cantly increased in value? Why not offset the losses in your portfolio against the stocks or the mutual funds that have gains? While Uncle Sam collects part of your gain, he also gives you a tax break on your losses. For example, if you bought a stock or a mutual fund at $10 and it’s now val-ued at $30, that would mean your stock would have a gain of $20 if you were to sell it. So you decide to sell the stock. For every $20 gain that you sell at a 15 percent capital-gain rate, that’s $3 in taxes you’re going to owe. Now if you happen to have a stock or mutual fund that you have a loss in, you can sell it at a loss and offset your gain. If your capital losses exceed your capital gains, the amount of the excess loss that can be claimed on your taxes is limited to $3,000, or $1,500 if you’re married filing separately. If your net capital loss is more than this limit, you can carry the loss forward to later years.

Now here’s the clincher: After you sell your $30 stock for a gain, you can buy it right back—even that day. If the stock still trades at $30, your new cost basis is $30 a share. Now let’s say that stock goes from $30 to $60 and five years from now and you sell it. You’re only going to owe


15 percent on your gain, which is $30. That’s a lot better than if you still owned the stock at your original cost basis of $10. In that scenario, you’d pay tax on a $50 a share gain. By selling the stock at $30, you reestablish your cost basis in that stock, as well as get rid of any taxes that you would have owed on that gain. And it’s all because you offset your gain with the sale of stocks that lost money.

If you own mutual funds outside of a retire-ment account, you know that your funds often make sizeable tax distributions. If you know you’re going to get a big end-of-the-year capital-gain distribution, you might want to offset that gain with some of the losses you have in your portfolio. But please be careful with this tactic. When you sell stocks and mutual funds at a loss, you can’t repurchase that exact same stock or mutual fund—or a significantly similar investment that does the same type of business—for 31 days after the sale of the investment. If you do, that’s called a wash-sale, and the IRS won’t allow you to deduct that loss from your taxes.

• Tax Tip #9: Create a revocable living trust. A tax-saving option I’d like you to seriously consider exploring is having a revocable living trust in place. If you don’t have a revocable living trust, then in my opinion you’re making one of the big-gest mistakes possible. Rather than setting up a revocable living trust, many people simply put the name of their children on their stock certifi-cates, home, and other assets, so their kids will


avoid probate. I beg you not to do this. Your chil-dren will be far better off if they inherit any asset that has capital gains built into it rather than receiving it as a gift.

Let me show you what will happen if you simply put your children’s name on your home while you’re alive, rather than letting them inherit it. Say you have a house that you pur-chased 30 years ago for $20,000, and now that piece of property is worth $300,000. When you put your child’s name on it or you gift it to them, you’re also gifting them the cost basis in that house. So your children have a house for a $20,000 cost basis. If they sell the house, they don’t qualify for the $250,000 tax exemption ($500,000 for married couples). They’re going to owe taxes on the difference between the $20,000 and whatever they sell it for. If they sell it for $300,000, they’re going to owe taxes on $280,000.

If, instead, you leave the house to your chil-dren via a revocable living trust, they’ll get what’s known as a step-up in cost basis on the house valued at the date that you died. If the house is worth $300,000 when you die, your children get a new cost basis of $300,000. If they sell it for $300,000, they aren’t going to owe a penny of income tax. So save your children money by thinking about how you title your assets.


Retirement Tax and Savings Incentives

If you’re eligible for any of the retirement tax and savings incentives, please don’t let one year go by without contributing the new maximum of $5,500 (if you’re at least 50 years old, the limit is $6,500 in 2013) to a Roth or a traditional IRA. Don’t fail to choose the new, higher yearly contribution limit to your employer retirement plan. If you’re over the age of 50, please note that you have additional privileges, which you had best take advantage of while they last. These include even higher limits on the tax-deferred contributions you can make to some retirement plans.

IRA (Traditional or Roth) The maximum amount that could be contributed to IRA accounts (traditional or Roth) and 401(k)s and 403(b)s has increased according to the following schedules:

IRA CONTRIBUTION LIMITS

Year

2016

Annual Contribution Limit(Under Age 50)

$5,500

Annual Contribution Limit(Age 50 and Above)

$6,500

Contribution limits are adjusted for inflation annually in $500 increments.

401(k) and 403(b) The maximum amount that can be contributed to 401(k)s and 403(b)s has increased according to the following schedule:


401(k) AND 403(b) CONTRIBUTION LIMITS

Year

2016

Maximum Deferral Limit(Under Age 50)

$18,000

Maximum Deferral Limit(Age 50 and Above)

$24,000

Annual contribution limits are indexed for inflation in $500 increments.

Since 2006, 401(k) and 403(b) plans have been allowed to offer a “Roth Contribution Program.” This program per-mits participants contributing to a 401(k) plan or 403(b) the option to designate a portion or all of their elective contri-butions to be treated like Roth IRA contributions. The Roth deferrals can be included in income in the year contributed, but earnings on the contributed amounts grow tax-free, and won’t be subject to income tax upon distribution. The Roth contribution limit is the maximum dollar amount of elec-tive deferrals a participant can contribute to a plan each year. Special rollover rules apply to Roth contribution programs: Distribution from Roth accounts may be rolled over, but only to Roth IRAs or to other Roth accounts in a 401(k) or 403(b) plan.

SIMPLE There are also new contribution limits for SIMPLE plans (maintained by employers with fewer than 100 employees and no other retirement plan):


SIMPLE CONTRIBUTION LIMITS

Year

2016


$12,500

Maximum Deferral Limit(Age 50 and Above)

$15,500

Annual contribution limits are indexed for inflation in $500 increments.

457 Plans 457 plans also have new contribution limits. Government 457 plans offer a special catch-up provision if you’re three or fewer years away from retirement: You can contribute up to twice the annual maximum.

457 PLAN CONTRIBUTION LIMITSYear

2013


$17,500

Maximum Deferral Limit(Age 50 and above)

$22,000

Annual contribution limits are indexed to inflation in $500 increments.

SEP-IRA The limit on annual contributions for the self-employed to their SEP-IRAs is either 25 percent of their net earnings or $53,000, whichever is less.


Savers Credit As of 2016, single filers with income under $30,750 could get a credit of between 10 percent and 50 percent of the amount invested in a retirement account—up to a $1,000 credit on a $2,000 contribution. That’s potentially $1,000 off your tax bill. It’s like the IRS paid for half your retirement. Married couples with joint income up to $61,500 are eligible for up to a $4,000 credit. So put $2,000 in an IRA. If you’re in the 15 percent bracket, that saves you $300. You also get the $1,000 credit. That means you’re only $700 out of pocket on a $2,000 investment. This credit is available for elective contributions to a Section 401(k) plan, Section 403(b) annuity, SIMPLE plan, or a SEP. It also covers contributions to a traditional or Roth IRA and voluntary after-tax employee qualified plans. The credit is in addition to any deduction or exclusion that otherwise applies to the contri-bution, and it’s available to persons over 17 and under 60 years of age—other than those who are full-time students or who are claimed as a dependent on someone else’s return. Distributions from retirement plans can reduce the amount of the credit, and the credit is allowable against an individual’s regular income-tax liability only. The more you make, the lower the percentage of your credit. The credit is based on adjusted gross income as follows:

Joint Filers

$0–$37,000$37,001–$40,000$40,001–$61,500

Above $61,500

Head of Household

$0–$27,750$27,751–$30,000$30,001–$46,125

Above $46,125

Single

$0–$18,500$18,501–$20,000$20,001–$30,750

Above $30,750

Credit Rate

50%20%10%0%


Education Tax and Saving Incentives

Coverdell Savings Account (Educational IRA) The annual contribution limit for this plan is $2,000. The income cap to qualify for an Education IRA is $110,000 for single filers and $220,000 for married filers. Even more enticing is that contributions and earnings from these accounts can be used to pay for educational expenses for grades K–12 as well as for college expenses. Qualified educational expenses now include: tuition; aca-demic tutoring; special-needs services; books; supplies; room and board; uniforms; transportation; supplementary items or services (such as extended-day programs); and the purchase of any computer technology, equipment, or Internet access (computer software primarily involving sports, games, or hob-bies isn’t considered a qualified school expense unless it’s edu-cational in nature). Although the money you contribute to a Coverdell Savings Account still isn’t tax deductible, the earn-ings will be tax free if spent on qualified educational expenses. Contribution to a Coverdell Savings Account is allowed in the same year that you make a contribution to a 529 college sav-ings plan. But please keep in mind that combined distributions from a Coverdell Savings Account and a qualified tuition pro-gram can’t exceed the beneficiary’s qualified higher education expenses for any year. Any distribution in excess of expenses needs to be returned to the account by May 31 of the following tax year or taxes will be imposed.

Section 529 Savings Plans Any earnings that accumulate in any Section 529 college-savings plan are income-tax free when used to pay qualified expenses for a child’s higher education—including payments for tuition, fees, room and board, and books. Qualified higher


education expenses include actual living expenses and neces-sary expenses incurred by special-needs students in connection with enrollment or attendance. You can still participate in a 529 plan no matter what your household income. Programs allow funding ranging from $15 per month to a total of more than $300,000. You can contribute $70,000 (by a single person) or $140,000 (married couple fil-ing jointly) without triggering the gift tax, assuming you don’t make another gift to that beneficiary for at least five years. The account is controlled by the individual who set up the plan—not the beneficiary—but it’s generally not included in the owner’s estate for estate-tax purposes. Some states also allow residents to deduct their contribution on their state tax returns. In addition, distributions are excluded from gross income if used to pay for qualified higher education expenses. As with educational IRAs, taxpayers receiving qualified tuition-plan distributions will also be eligible to claim either the American Opportunity Credit or Lifetime Learning Credit for a taxable year as long as the distributions aren’t used for the same expenses for which a credit is claimed. For the more information on Section 529 plans, please visit the Website www.savingforcollege.com. By the way, given the tax advantage for Section 529 plans, there’s now no reason whatsoever to save for college via a Uniform Gifts to Minors (UGMA) or a Uniform Transfer to Minors (UTMA) account. In my opinion, these accounts are now obsolete.

Deductibility of Student-Loan Interest Student-loan interest on qualified educational or refi-nanced loans is tax deductible up to an annual limit of $2,500. No deduction is allowed to an individual if he or she is claimed as a dependent on another taxpayer’s return. There’s no longer


a limit on the term of the loan or restrictions for voluntary payments while the loan is deferred or in forbearance. In 2016, if your adjusted gross income (AGI) is under $130,000 (for married couples filing a joint return) or $65,000 (single filers), you can deduct the full amount of interest paid each year. Mar-ried couples filing jointly with an AGI between $130,000 and $160,000, and single filers with AGIs of $65,000 to $78,000, are able to deduct a portion of the interest paid. These income levels are adjusted annually for inflation.

Deductibility of Higher Education Expenses In 2016, if you met the income qualifications, you could take advantage of a tax deduction for higher-education expenses. In 2016, a maximum $4,000 deduction applied to single filers with AGIs of $65,000, or joint filers with AGIs of $130,000 or less. Single filers whose AGIs were between $65,000 and $80,000, and joint filers whose AGIs were between $130,000 and $160,000, could claim a deduction up to $2,000.

The Lifetime Learning Credit and American Opportunity Credit

Both of these education tax credits are available to parents who paid qualified education expenses. In any given year, you may only claim one credit per child—that is, either the Lifetime Learning Credit or the American Opportunity Credit. The Lifetime Learning Credit allows for a maximum annual credit of $2,000 per tax return. This credit is available for a mar-ried couple that files a joint tax return with a modified gross income below $130,000 and for individuals with a modified income below $65,000.


The American Opportunity Credit allows a maximum annual tax credit of $2,500 per eligible student. This credit is available for a married couple that files a joint tax return with a modified gross income below $180,000 and for individuals with modified income below $90,000. You can learn more about education tax credits at the IRS Website: www.irs.gov/Individuals/Education-Credits.

Estate Planning Incentives

Estate and Gift Tax Exemptions In 2016, only estates that are valued above $5.45 million are subject to the federal estate tax. That limit will be indexed for inflation each year. The maximum tax rate is 40 percent.

Family Tax Incentive

Child Credit A credit is a dollar-for-dollar reduction in your tax, which makes it much more valuable than a deduction. In the 25 per-cent tax bracket, a $100 deduction saves you $25. A $100 credit saves you $100. The credit is $1,000 per child for 2016.

Extension and Expansion of Adoption Tax Benefits

For 2016, the maximum credit (and employer-benefits exclusion) for adoptions is $13,460 per eligible child. The income phase-out range applicable to the credit and exclusion


is set at modified adjusted gross incomes between $201,920 and $241,920, and the adoption credit is allowed against the alterna-tive minimum tax.

Investing Tax Incentives

Dividend and Capital-Gains Taxes In 2016, qualified dividends and investments held at least before being sold for a gain are taxed at a flat 15 percent rate for individuals with income between $37,650 and $415,050 and married couples filing a joint tax return with income between $75,300 and $466,950. Above those upper limits, the rate is 20 percent. Investments owned for less than one year and sold for a gain are taxed at your ordinary income-tax rate.

Alternative Minimum Tax (AMT) The AMT exemption for 2016 was $83,800 for joint returns and $53,900 for unmarried taxpayers.

Small-Business Credit for Retirement Plans Small businesses (those with at least 1 but no more than 100 employees who received compensation in excess of $5,000 in preceding year) may claim a credit for 50 percent of the first $500 of qualified expenses connected with setting up and maintaining a new tax-qualified retirement plan, SIMPLE plan, or SEP during the first three plan years of the new plan.


Last Words on Taxes

Taxes are inevitable as death. While I can’t eliminate them for you, hopefully this book has given you some tips and guid-ance on how to take advantage of tax credits, incentives, and deductions, so you can put more money in your pockets and worry less about Uncle Sam.


About the Author

Suze Orman has been called “a force in the world of per-sonal finance” and a “one-woman financial advice power-house” by USA Today. A two-time Emmy Award–winning television host, New York Times mega-best-selling author, magazine and online columnist, writer/producer, and one of the top motivational speakers in the world today, Orman is undeniably America’s most recognized expert on personal finance.

Orman for 16 years was the contributing editor to O, The Oprah Magazine and for 13 years hosted the award-winning The Suze Orman Show, which aired every Saturday night on CNBC. Over her television career, Suze has accomplished what no other television personality ever has before. Not only is she the single most successful fund-raiser in the history of public television, but she has also garnered an unprecedented eight Gracie awards, more than anyone in the 41-year history of this prestigious award. The Gracies recognize the nation’s best radio, television, and cable programming for, by, and about women.

In 2010, Orman was also honored with the Touchstone Award from Women in Cable Telecommunications, was named one of “The World’s 100 Most Powerful Women” by Forbes, and was presented with an Honorary Doctor of Com-mercial Science degree from Bentley University. In that same month, Orman received the Gracie Allen Tribute Award from the American Women in Radio and Television (AWRT), which is bestowed upon an individual who truly plays a key role in laying the foundation for future generations of women in the media.

In October 2009, Orman was the recipient of a Visionary Award from the Council for Economic Education for being a champion on economic empowerment. In July 2009, Forbes named Orman 18th on their list of “The Most Influential Women In Media.” In May 2009, Orman was presented with an honorary Doctor of Humane Letters degree from the Uni-versity of Illinois. In May 2009 and May 2008, Time magazine named Orman as one of Time’s “100 Most Influential People in the World.” In October 2008, Orman was the recipient of the National Equality Award from the Human Rights Campaign.

In April 2008, Orman was presented with the Amelia Earhart Award for her message of financial empowerment for women. Saturday Night Live spoofed Orman six times during 2008–2011. In 2007, Businessweek named Orman one of the top 10 motivational speakers in the world—she was the ONLY woman on that list, thereby making her 2007’s top female motivational speaker in the world.

Orman, who grew up on the South Side of Chicago, earned a bachelor’s degree in social work at the University of Illinois, and at the age of 30 was still a waitress making $400 a month.