Downtown Lodi Live, November 2007

How a $51 gift can save you $3,400

Have you ever thought, "isn't there anything else I can do to reduce my tax bill"? Well, there are many strategies that can be applied. However, you first have to know what they are before you can apply them. A competent and professional preparer should be able to provide you with some viable options.

I often tell my clients, I'm not being paid to just file your tax forms – it's my job to help you cut your taxes as well. Typically, I ask a lot questions and spend a lot of time in order to get a clear picture of my client's unique and individual tax situation. This is an important part of the tax process. It allows me to determine if there are any tax strategies that may apply to them.

For example, many taxpayers help support their parents throughout the year. In order to claim an exemption for a parent, a taxpayer must provide more than 50 percent of his or her total support for the year. Parents can't be dependents if their gross incomes are more than the personal exemptions. For 2006, each exemption was $3,300 and increases to $3,400 for 2007. For this purpose, gross income does not include Social Security benefits, insurance proceeds, inheritances or gifts.

To determine if a client has provided more than half of a parent's support, it must first be determined the total support provided for that purpose. Total support includes amounts spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities.

So, if my tax client is supporting an elderly parent, I tell her to keep an eye on the parent's earned and investment income. When it reaches $3,000 or so, it may make sense to have the parent postpone income until the next year or make investments that will produce tax free income.

It's also important to watch out for the half-support rule. Money that a parent receives from Social Security may be saved or used to buy gifts, while money from the adult child is used to pay for food and rent.

In a pinch, a client can give a parent a few dollars more to put her over the half-support mark. For example, Mary's elderly mother earned $3,250 in gross income for 2007. Currently, Mary provides $3,200 in support to her mother. An extra gift of just $51 from Mary that goes toward her mother's support could tip the support rule in Mary's favor. With the extra gift Mary is now providing $3,251 in support to her mother, which is over 50 percent of her mother's total support. By doing this, Mary can salvage the $3,400 exemption by claiming her mother as a dependent.

As you can see, with just a little bit of thought and planning, tax dollars can be saved. There are many other strategies and tips that can be used to reduce your tax. This was just one example.

For more information, please contact our offices in Lodi 366-0746 and Galt 745-4829.