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Note These Breaks Now
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Alison Teetor of Berryville, Va., who's in charge of her ailing mother's money, began over the summer to take advantage of a "gifting" benefit that allows a person to give anyone up to $12,000 a year as a present without the recipient having to pay tax on it.
On the advice of the family's financial planner, James F. Ludwick of Odenton, Teetor transferred that amount from her mom's estate into a 529 college fund for each of her two sons, ages 14 and 16. If the boys use it to pay for college, the money and the interest and dividends it earns will never be taxed.
"Someone worked hard for that money, so it's better to give as little of it as possible to the government," Teetor said.
People with multiple financial relationships -- a tax attorney, an accountant, a financial planner -- must make sure that only one person acts as a traffic cop when making tax decisions, Perrins said. Otherwise, one adviser could act at cross-purposes with another, unwittingly eliminating some tax benefits or possibly even incurring penalties.
Taxpayers determined to seek tax breaks without a planner's advice should make sure they understand how each potential benefit fits their particular situation before deciding to use it. Moreover, they need to understand the differences between deductions, exemptions and credits. Deductions and exemptions reduce the amount of income that will be taxed. A credit, on the other hand, is an amount you subtract after you have figured out your tax bill: It will either directly boost your tax refund or cut what you owe.
Those who go it alone should consider using a computer program -- Intuit's TurboTax and H&R Block's TaxCut are two of the most popular -- that can quickly run tax scenarios under regular rules and under the AMT, and figure out the impact of various credits or deductions.
Whether you do your own taxes or rely on professional help, if you're planning to take any credits or deductions next season, make sure you save all the paperwork that's needed to back them up. The IRS expects taxpayers to keep records, including canceled checks and receipts from charities, to show the breaks are justified.
Is there something about taxes or another personal finance issue that you find irksome or confusing? Write to Kathleen Day atdayk@washpost.com.
