Tax Deductions for High Income Families/ Earners (Tax Series Part 2)

Today we continue on our journey to pay less tax.  The topic is tax deductions. Will Rogers said

The difference between death and taxes is death doesn’t get worse every time Congress meets.

Due to the complexity of the United States tax code, there are hosts of tax deductions that we must wade through in order to maximize the income we can contribute to retirement accounts, save for college expenses and generally be able to spend and take care of our families.

Tax Deductions for High Income Families Earners

We have already discussed the Tax Credits for High Income Families/ Earners. I will try to isolate the deductions in the same way we looked at the credits. Those deductions that can be used by high earners with be highlighted in green. Those that phase out as incomes grow are highlighted in red.  I apologize in advance to my color blind readers.

Employee Business Expenses

Transportation Costs

tax deductions high income families earners

Does mileage apply to skateboards?

These can be tricky. Commuting isn’t deductible, but some transportation costs are. If you have to drive from your usual place of business to other locations, those transportation costs are deductible. If you usually work from home, but travel to an office or other work related location occasionally, then that is deductible. These are nice deductions for high-income earners because there are no income limits for eligibility. 

Mileage Rates for 2017

  • 53.5 cents per mile for business miles driven, down from 54 cents for 2016
  • 17 cents per mile driven for medical or moving purposes, down from 19 cents for 2016
  • 14 cents per mile driven in service of charitable organizations

Expenses required by your business are deductible. Items like a uniform or tools required by the employer are also deductions.

The best way to deduct these expenses is to turn in the expenses to your employer. That way they also potentially avoid social security and medicare taxes.  The rules for the employer deducting these expenses are that you incurred theses expenses while performing services as an employee and told your employer about the expenses in a reasonable time. Our company makes us turn in our expenses by the middle of February the year after the expense occurred so that they have enough time to get the accounting right for payroll and filing tax forms.

Home Office

If you use a part of your home for business, it can be deducted. You need to have the exact percentage of your home that you use and the time that you use it. You need to have all the costs to own and run your home and take only the percentage that you use. There are stories about the IRS not being very understanding with home office interpretations, but no one really knows if it is a trigger for an audit, except the auditing agents.

Car Deductions

If you use your car solely for business, you could deduct the entire cost of the vehicle. If you are like most of us and use a vehicle for business and pleasure/personal reasons, you need to know the exact percentage used and multiply the costs by that. You could also just use a mileage calculation (53.5 cents/mile).

Travel Expenses

Business travel is deductible including airfare, car rental, hotel and other required travel expenses. If you bring your partner or family, then you can only deduct the expenses incurred by you, the employee. Two plane tickets, one is deductible. One hotel room, the whole thing is deductible. If you take an extra couple of day of vacation after you are done with your conference/business travel, those extra days aren’t deductible. Bottom line, if you have to buy it to conduct business, it is probably deductible, if not, it isn’t. If something is questionable you could consult an accountant, but they will most likely play it safe and tell you not to deduct it. 

Bad Debt

You can deduct a business debt if you can show that it was intended to be a loan and you have no reasonable expectation that you can recoup the debt. If you deduct it and later end up collecting, then you will have to amend your return.

Business Entertainment

tax deductions high income families earners

If I catch my meal, is the pole deductible?

50% of meals and entertainment while conducting business are deductible, but you need to have records.

Depreciation

You can deduct certain real property purchased by your business or for business. Different items have different depreciation schedules. You just need to look up the number of years each type of property can be depreciated.

Investment Deductions

These are some of the more fun deductions (if there is such a thing).  You get deductions while you are investing money to make more money. Win, Win, Win. 

Sale of Personal Home

If you sell the home that you have lived in at least two of the previous five years, you can exclude taxes from $250,000 from the profit of the sale. That means you could buy a house and if it appreciates $250,000, that is all tax-free as long as you lived in it two of the past five years. If you are married and file jointly, you get $500,000. This is possibly the best gift a high-income earner gets from the government since we are usually buying the homes that could appreciate this much in a lifetime.  It is another thing to think about when you are buying a property for personal uses. 

IRA (Individual Retirement Arrangement) Contribution

This is one most of us won’t get to take. You can deduct contributions to a traditional IRA if you are within the income limits in the table below. 

tax deductions high income families earners

This means that if you and your spouse make less than $184K and you aren’t eligible for a workplace retirement plan (401k, 403b, SEP IRA, Defined Benefit Plan, etc) then you can contribute to a traditional IRA and deduct it. As you approach the upper limits in the table, your deduction phases out and eventually you get nada.

If you can’t deduct your IRA contribution then a backdoor Roth IRA is probably your best bet. A backdoor Roth IRA is where you convert the funds from a traditional IRA contribution to a Roth IRA when you aren’t’ eligible to directly contribute to a Roth IRA because of income level. If you have no other IRA funds and you already paid taxes on the traditional contribution anyway, you don’t have to pay any additional taxes converting the funds to the Roth IRA. Be careful if you have other traditional IRA funds because pro rata rules do apply. 

Capital Losses

This is another great one for high-income earners. Most anything you own for investment purposes is a capital asset. If you sell that asset at a loss, that is a capital loss and you can deduct that against your gains. For example, you buy 100 shares of AAA stock for $10,000. You sell it for $5,000. That is a capital loss of $5,000. If you have other capital gains for that year, you can apply that $5,000 loss to those gains so you don’t pay tax on up to $5,000 of the gains. If you don’t have $5,000 in gains, you can apply up to a $3,000 deduction to your regular income. That is a great deal because if you are in a higher tax bracket, (like 33 to 39.6%) then you saved that income tax percentage in taxes on $3,000 that year. If you have more losses than gains and more than $3,000 in losses, you can apply those losses to gains and income in the years to come.  

Education

Student Loan Interest

This one isn’t very helpful for us. You can deduct up to $2,500 in student loan interest paid on eligible qualified student loans. The income limits are $65,000 to $80,000 for singles and $130,000 to $160,000 for married filing jointly. 

Tuition and Fee Deduction

This one has expired unless congress renews it for 2017 but it is probably not helpful to most of you anyway. You can deduct qualified tuition and fees for higher education if you make less than $65,000 to $80,000 filing single or $130,000 to $160,000 married filing jointly. You can’t claim the deduction if you claim Lifetime Learning Credit or the American Opportunity Credit on the same student either. Also, you can’t deduct if the money is paid from a tax-advantaged account (529, Coverdell ESA).

Work Related Educational Expenses

This is similar to the business expenses above. If you need to maintain certifications or boards with educational requirements, then those are deductible. Examples include continuing medical education (CME), continuing education units (CEU), and continuing legal education (CLE). 

Teacher Education Expenses

Unfortunately, we don’t pay our teachers enough to qualify as high-income earners as defined in What Makes a High Income Earner , but maybe a college professor or two could benefit from this one. Educators can deduct up to $250 of unreimbursed business expenses for classroom-related materials. 

 

 We will pick up with the remaining deductions in the next installment. You can find it at Tax Deductions for High Income Families/ Earners Part 3.

Don’t forget to go over Tax Credits for High Income Families/ Earners Part 1.

Let me know if I’ve left anything out of the topics discussed so far. Comment below about how you used your home office deduction. We will continue on in the next post. 

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Tom
Tom is a doctor, husband and father of five with a passion for parenting and finance. When he isn't skateboarding, riding BMX, or jumping on the trampoline with his kids, he is reading and writing about personal finance. He helps high income parents educate and mentor their kids to become financially, emotionally, and intellectually self sufficient.

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