Five tax deductions for landlords

For many rental property owners, tax deductions can mean the difference between making and losing money. Fortunately, landlords can take advantage of federal tax deductions in the form of the following:

1. Loan interest

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 Loan interest is generally the single largest expense that rental property owners have to pay. Landlords can deduct interest on mortgages for the rental property, interest on credit cards, and interest on personal loans used to maintain or improve the rental property.

2. Repairs

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 Landlords spend a lot of money each year in repairs: the costs of re-painting walls, replacing broken tiles, or fixing leaky water heaters, and other similar activities qualify for this type of tax deduction. As long as the repairs don’t extend the life of the property or add material value to the property, the rental property owner can write them off.

3. Local and long distance travel expenses

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 Landlords can deduct travel expenses as long as the trips were made in connection to the property, for example, showing prospective tenants around the property. For local travel, landlords can apply for a tax deduction every time they drive to the property. Landlords can deduct the cost of fuel, car repairs, and maintenance. Long-distance travel expenses typically include transportation costs, lodging, and meals.

4. Legal and professional fees

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 If a landlord hires a lawyer, accountant, real estate agent, or some other professional for assistance in running his business, the fees that the landlord pays are deductible.

5. Casualty losses

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The loss or damage of a property due to an unexpected, sudden, and unusual event like earthquakes, hurricanes, and floods is tax-deductible. The amount that could be written off depends on the amount of damage undergone by the property and the coverage of the landlord's insurance.

Before attempting to claim any tax deductions, in case of an audit, landlords must keep permanent records of tenant leases, legal documents, permits, and property titles, and short-term records, like lists of repairs, advertising costs, and wages paid.  

Isidor Hefter is a certified public accountant specializing in tax planning and research for corporations and individuals with high net worth. For more tax-related articles, subscribe to this blog.

Tax Planning Basics: 3 Ways to Reduce Taxes

Still new to tax planning? This article from Taxes.About.com provides three invaluable ways by which you can cut back on your taxes.

The goal of tax planning is to arrange your financial affairs so as to minimize your taxes. There are three basic ways to reduce your taxes, and each basic method might have several variations. You can reduce your income, increase your deductions, and take advantage of tax credits. 

Reducing Income

Adjusted Gross Income (AGI) is a key element in determining your taxes. Lots of other things depend on your AGI (or modifications to your AGI)-- such as your tax rate and various tax credits. AGI even impacts your financial life outside of taxes: banks, mortgage lenders, and college financial aid programs all routinely ask for your adjusted gross income. This is a key measure of your finances.

Because your adjusted gross income is so important, you may want to begin your tax planning here. What goes into your adjusted gross income? AGI is your income from all sources minus any adjustments to your income. The higher your total income, the higher your adjusted gross income. As you can guess, the more money you make, the more taxes you will pay. Conversely, the less money you make, the less taxes you will pay. The number one way to reduce taxes is to reduce your income. And the best way to reduce your income is to contribute money to a 401(k) or similar retirement plan at work. Your contribution reduces your wages, and lowers your tax bill.

You can also reduce your Adjusted Gross Income through various adjustments to income. Adjustments are deductions, but you don't have to itemize them on the Schedule A. Instead, you take them on page 1 of your 1040 and they reduce your Adjusted Gross Income. Adjustments include contributions to a traditional IRA, student loan interest paid, alimony paid, and classroom related expenses. A full list of adjustments are found on Form 1040, page 1, lines 23 through 34. The best way to boost your adjustments is to contribute to a traditional IRA.

As you can see, two of the best ways to reduce your taxes is to save for retirement, either through a 401(k) at work or through a traditional IRA plan. Contributions to these retirement plans will lower your taxable income, and lower your taxes.

Increase Your Tax Deductions

Taxable income is another key element in your overall tax situation. Taxable income is what's left over after you have reduced your AGI by your deductions and exemptions. Almost everyone can take a standard deduction, and some people are able to itemize their deductions. Itemized deductions include expenses for health care, state and local taxes, personal property taxes (such as car registration fees), mortgage interest, gifts to charity, job-related expenses, tax preparation fees, and investment-related expenses. One key tax planning strategy is to keep track of your itemized expenses throughout the year using a spreadsheet or personal finance program. You can then quickly compare your itemized expenses with your standard deduction. You should always take the higher of your standard deduction or your itemized deduction.

Your standard deduction and personal exemptions depends on your filing status and how many dependents you have. You can increase your standard deduction and personal exemptions by getting married or having more dependents.

The best strategies for reducing your taxable income is to itemize your deductions, and the three biggest deductions are mortgage interest, state taxes, and gifts to charity.

Take Advantage of Tax Credits

Once we've tweaked our taxable income, we are ready to focus our attention on various tax credits. Tax credits reduce your tax. There are tax credits for college expenses, for saving for retirement, and for adopting children. The best tax credits are for adoption and college expenses. Not everyone is in a position to adopt a child, but everyone could take some college classes. There are two education-related tax credits. The Hope Credit is for students in their first two years of college. The Lifetime Learning Credit is for anyone taking college classes. The classes do not have to be related to your career.

You may also want to avoid additional taxes. If at all possible, avoid early withdrawals from an IRA or 401(k) retirement plan. The amount you withdraw will become part of your taxable income, and on top of that there will be additional taxes to pay on the early withdrawal.

One of the best, and most abused, tax credit is the Earned Income Credit (EIC). Unlike other tax credits, the EIC is credited to your account as a payment. And that means the EIC often results in a tax refund even if the total tax has been reduced to zero. You may be eligible to claim the earned income credit if you earn less than a certain amount.

Increase Your Withholding

You can avoid owing at the end of the year by increasing your withholding. More money will be taken out of your paycheck throughout the year, but you will get bigger refund when you file your taxes.  

Source: http://taxes.about.com/od/taxplanning/a/taxplanning.htm