Save Money on Taxes
Ten important tax saving ideas that could save you thousands of dollars a year in income taxes.
- Maximize contributions to retirement plans. This is tax saving rule number one for all working age people, and the maximum amount you can contribute to these plans is rising. Not only do you save taxes in the current year, but you also save taxes every year thereafter as the money grows tax deferred. Even when you don't receive a current tax deduction (a Roth IRA or nondeductible IRA contribution, for example) you'll still enjoy lower taxes in the future.
- Consider a Roth IRA Conversion. Converting your traditional IRA into a Roth IRA doesn't save money in the year you do it. In fact, it costs money. But it's well worth it in most circumstances because the taxes you will save later on are enormous. If your income is too high to qualify for a Roth conversion, wait until 2010 when the rules
- Own a home. The tax benefits of home ownership, notably the deductibility of mortgage interest and property taxes, can often allow renters to buy a home that doesn't cost a whole lot more than the rent they were paying. While a big tax deduction for mortgage interest isn't something you want to maintain indefinitely, there are many more benefits to owning a home. Think of the tax deductions is icing on the cake. If and when you eventually sell your abode, you'll be able to put a substantial amount, if not all of any gain into your pocket, free of taxes.
- Pay attention to how your investments are taxed. Putting as much money as you can into retirement accounts alleviates the problem of investment taxes since the money inside the accounts is not subject to taxes until you begin withdrawing it in retirement. But, taxes can be saved by judicious timing of the withdrawals from retirement plans after you retire. In the meantime, if you have money in non-retirement accounts, be sure to take maximum advantage of the low tax rates accorded most dividends and capital gains for stock held for a least one year. Paying attention to how investments are taxed can provide a nice bonus to your investment balances over the years.
- Make tax wise charitable contributions. Heaven knows that charities can benefit from your beneficence, and you save taxes to boot. Cash is gratefully received but you should also donate any usable but unneeded clothing and furniture. If you donate appreciated stock that you've held for a least one year, you get a deduction for its full value without having to pay a tax on the gain. Finally, if you can afford to donate it least $10,000 in cash or appreciated securities, you can receive a lifetime annuity income as well as a partial tax deduction for the amount donated. These are called "charitable gift annuities," and if you call your favorite charity to inquire, they'll be more than happy to fill you in on the details.
- Make the most of your employer's fringe benefits. Employer fringe benefits are almost always tax-free and your employer may offer a variety of benefits including flexible spending plans. It behooves you to understand fully how the various benefits and plans work so you can take maximum advantage of them.
- Own a business. While you shouldn't start a business solely for the tax breaks, if you ever own a business, even a sideline enterprise, you'll be glad to know that the powers that be bestow many tax blessings on small business owners, including some very generous retirement savings plans.
- Look for tax credits. Tax deductions are nice, but tax credits are the holy grail of tax saving opportunities. For example, a $1,000 tax deduction will save you $250 in taxes if you were in the 25% tax bracket. A $1,000 tax credit, on the other hand, reduces your tax bill by $1,000 no matter what tax bracket you're in. Sadly, a lot of taxpayers who qualify fail to take advantage of them. Examples of available tax credits include the adoption credit, the child care and dependent care credits, earned income credit, credit for the elderly and disabled, health insurance credit, retirement savings contributions credit, and credits for college tuition. You'll have to do a little digging to find out if you qualify, but it's a crying shame to miss out.
- Look for deductions available for non-itemizers. Contrary to popular opinion, tax deductions aren't just for fat cats. There are a number of deductions and credits available for those who don't itemize deductions. Deductions include retirement plan deductions, student loan interest, job related moving expenses, self-employed medical insurance, college tuition deductions, and alimony paid. Many of the tax credits enumerated above in tax saving idea Number 8, above, are also available for non itemizers.
- Timing is everything. Finally, the timing of various tax-related transactions can make or break a tax deduction. Whether it's deciding on which tax year to make a tax deductible payment, selling your home, or making retirement plan withdrawals, to name but a few, don't let a poorly timed decision cost you tax payments that could have been avoided.