15 Tax Saving Tips
Tax Tip 1 : Defer IncomeAre you close to a lower tax bracket? If so, you might consider deferring payments and income until next year, which will lower your current year taxable income. Here are a few ways to take advantage of this potential tax break:
Tax Tip 2 : ReceiptsKeep all business-related receipts. Keep track of what the receipts are for, and save them in a safe place. This will help you to differentiate between capital and revenue receipts.
Tax Tip 3 : Count your kidsThe Child Tax Credit allows you to reduce your federal income tax by $1,000 for each qualifying child under the age of 17. This credit begins to phase out if your modified Adjusted Gross Income is above $110,000 for joint filers, or $75,000 for single or head of household filers.
Tax Tip 4 : On your homeMortgage interest is deductible as is real estate taxes. Generally, if you pay points on your mortgage when you purchase your home, those points are deductible in full in the year your purchase the home. But, you can also choose to deduct them ratably over the life of the loan. This may make sense if you purchase your home very late in the year and will not otherwise have enough deductions to allow you to itemize in the year you make the purchase.
Points paid on refinancing a mortgage on the other hand are not fully deductible in the year the transaction takes place. Rather, the points can only be deducted ratably over the life of the new loan term. Remember to write off any remaining unamortized points though if you then subsequently sell the home and pay off the mortgage.
Also from 2007, mortgage insurance will be deductible. Selling your home may allow you to walk away with a tax free gain.
Tax Tip 5 : Fund Your RetirementContribute to a deductible Individual Retirement Account (IRA), if you qualify. The investments grow tax deferred if it is a conventional IRA; tax-free if it is a "Roth" IRA. The contributions to a Roth IRA, however, are not deductible. You have until April 15 to open an IRA and make a deductible contribution for the prior year. If you have a 401K plan at work, make as large a contribution as you're allowed to make.
The self-employed have alternative retirement plans to consider, but some of them must be opened by December 31st. This money can grow to a substantial sum because it is compounded, over time, free of taxes.
To maximize the growth of your annual IRA contribution, always make it at the beginning of the year. Remember that there are different maximum amounts to be contributed depending on whether you are over 50 years of age.
Tax Tip 6 : Don't Buy a Tax BillMutual funds often pay out most of their capital gains and dividends in December - and this year more than $400 billion will be paid out, a new record. Don't think you're getting a windfall if you buy just before the payout. It's a tax mistake. When interest, dividends and profits are paid out, share values fall by the same amount. But the payout is taxable; you're better off buying after the distribution - you get your shares at the lower price and avoid the tax bill on what is essentially a rebate of part of your purchase price. Before you invest, call the fund to ask for the ex-dividend date and buy after that day.
If you plan to sell shares around year-end, it usually makes sense to do so before the ex-dividend date. When you sell, any accumulated dividends and capital gains are included in the share price and therefore are considered part of your profit. If you've owned the shares more than 12 months, you get 15% long-term capital-gains treatment. When the fund pays out the dividends, the share price drops and so does your taxable profit when you sell. But the 15% gains are replaced dollar for dollar by the income distribution - part of which could be taxed in your top bracket, as high as 35%.
Tax Tip 7 : Charitable DonationsRemember charitable donations. While donations should not be made simply for tax purposes but for philanthropic reasons, you can always make a couple more at the end of the year to lower your tax bite. Remember to get receipts.
Tax Tip 8 : Consider Gifts to ChildrenIf you intend to make gifts to children (or other relatives), do it well before December 31st so that the checks clear. Gifts up to $12,000 per person need not be reported. In fact, you can give $12,000 in December and another $12,000 in January for a total of $24,000 over the two months. If you skip making the gift this year, there is no looking back. Each year stands on its own.
Tax Tip 9 : Going green paysIf you made energy-efficient improvements to your home, you may garner a tax credit of up to $500. Improvements include exterior windows and doors, insulation to walls, ceilings, high efficiency water heaters, furnaces and boilers, and central air conditioning units. Additionally, a tax credit may be available for the purchase of a hybrid or alternative fuel vehicle. Check with the IRS at www.irs.gov for a list of qualifying vehicles.
Tax Tip 10 : Moving & Relocation ExpensesIf you meet the requirements, you can deduct the reasonable expenses of moving your household goods and personal effects to your new home. You can also deduct the expenses of traveling to your new home, including your lodging expenses. You cannot, however, deduct meals."
Tax Tip 11 : Classroom Expenses for TeachersIf you are an eligible educator, you can deduct from gross income a portion of your qualified expenses. You can deduct these expenses even if you do not itemize deductions on Form 1040, Schedule A. This deduction is for expenses paid or incurred during the tax year. Previously, these expenses were deductible only as a miscellaneous itemized deduction subject to the 2% of adjusted gross income limit."
Tax Tip 12 : Child & Dependant Care ExpensesThe Child and Dependent Care Credit provides a tax credit based on a percentage of your expenses for childcare, daycare, or adult daycare services. To qualify, you must have a dependent child age 12 or younger, or a dependent who cannot care for himself or herself.
Tax Tip 13 : Student Loan InterestGenerally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $70,000 ($140,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2007.
Tax Tip 14 : AlimonyAlimony is taxable income for the recipient and is a tax deduction for the payer. You must report alimony you received on Form 1040 Line 11. Alimony paid is reported on Form 1040, Line 31.
Tax Tip 15 : Double-check your workErrors in tax preparation and on tax returns account for millions of dollars that taxpayers could have saved every year. Remember to double-check.