Explanation of the Major Factors Affecting Your Tax Returns


Deductions are expenses that are subtracted from your adjusted gross income when calculating taxable income. There are three types of standard deductions depending on your filing status (single, married filing jointly, or head of household). In certain cases, we recommend making itemized deductions which can reduce your taxable income.


The gift tax is imposed on the donor and there is a tax exclusion that applies. There are no exclusion limits on gifts given to a spouse for the first $143,000 unless the spouse is not a U.S. citizen. Each spouse has their own exclusion amount which is $14,000 per year. You have to file a gift tax return but you don't have to pay the tax unless it exceeds $5,250,000 through the years.

Gifts can reduce income and estate taxes. Giving to charity does not have a $14,000 tax exclusion and it reduces both taxes. Giving money to relatives does not reduce your income taxes but it does reduce your estate taxes. When your estate is worth more than $5,000,000, the amount above that figure is subject to estate taxes. When you die, 40% of that taxable portion goes to the Federal Government. So making tax-free gifts can reduce your taxable estate.

The recipient of the gift does not report income except when the gift is a property or stock. The recipient still has to pay taxes if he or she makes a profit from the gift.


When talking about family taxes, we must consider marriage and divorce.

First let's address the former. You can identify dependents to reduce your taxable income. In order for someone to be claimed as a dependent, they must meet one of the following five tests: support, gross income, citizenship, joint return, member-of-household or relationship test. We will clarify three of themIn the case of a divorce, there are two important topics to discuss. Alimony is a payment to or for a spouse or former spouse under a divorce or separation. Child support is the payment for a child under a divorce or separation.

In order to get alimony, one spouse must prove that they cannot support themselves, and they must prove that the other spouse has the money to pay. The courts decide if the alimony should be paid considering the length of the marriage, the ages of both spouses, their earning capacities, the type of property involved, and the conduct of both spouses. In general, if a spouse has been dependent of the other, a judge will award alimony to him or her.

To determine the amount for the child support payments, there are guidelines provided by the Welfare Reform Act of 1997, which is being incorporated into each state. A weekly income for the child is established using the gross income from both parents, also giving allowances for deductions for taxes and other mandatory payments.


When the tax rate system was created, married households with two incomes were very rare so the taxes were imposed with the assumption that two people were supported only by the head of the household. Nowadays, around 78% of married households have dual incomes, unfortunately the tax tables and codes have not been updated, so married couples pay more income taxes than if they were single. This is called the marriage penalty.

Here are some examples of marriage penalty:


For many years, people passed assets to their children to take advantage of their children's lower tax rate. For this reason, the IRS has placed limitations on this tax-savings technique. The "kiddie tax" is not really a tax at all, but a provision with the following guidelines:The kiddie tax applies to dependents under 19 and dependent full-time students under 24.


Home equity loans, mortgages, reverse mortgages.


A mortgage is a loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower (mortgagor) gives the lender (mortgager) a lien on the property as collateral for the loan. It includes the amount of principal, interest, real estate taxes, and property insurance or private mortgage insurance (PMI). You have the option to pay additional points equivalent to a portion of the closing interest to get a lower interest rate; this only makes sense if you plan to stay in that home for more than seven years.

You can deduct your home mortgage interest and real estate taxes when you file your taxes. "Points", another form of mortgage interest, may also be deductible depending on your local laws. You will receive a mortgage interest statement with the amounts paid through the year at the end of January.

Reverse Mortgages

A reverse mortgage is an arrangement in which a homeowner borrows against the equity in his/her home and receives regular monthly tax-free payments from the lender. This arrangement is also called a reverse-annuity mortgage or a home equity conversion mortgage.

You can exclude $250,000 ($500,000 if you are married filing jointly) from capital gains on the sale of personal property.

Home Equity Loans

A home equity loan is an arrangement in which you borrow against the equity of your home. The equity is determined by the difference of the home's value and your outstanding mortgage balance. In other words, you gain equity as you pay off the principal of your mortgage. Home equity loans have become more popular because of low interest rates and tax deductibility. Interest rates for home equity loans are lower than other loans; since you are borrowing against the equity of your home, loans are more secure. You can deduct the interest on home equity loans up to a limit of $100,000.


There are different ways to save for Education purposes. Education IRAs can enable you to save up to $2,000 per year. A 529 Plan allows you to prepay tuition for qualified universities or save funds in tax-deferred accounts. Taxes on the earnings within this plan are deferred until the money is withdrawn. HOPE/Lifetime credits lets qualified people take up to a $2,500 tax credit for payment of qualified education expenses.
By InvestorGuide Staff

Copyrighted 2016. Content published with author's permission.

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