Don’t miss these tax deductions and credits, which can add up to significant savings over the years.
Around the time I stopped fighting with my parents and began listening to them, my dad imparted some brilliant financial advice. He told me to become a scholar of the tax law. OK, perhaps he didn’t use those exact words, but the message was the same: Know the tax law and take every tax deduction to which you are entitled. This advice stuck with me, and I’m certain it has saved me thousands of dollars. The IRS website offers excellent resources to help you further understand the following tax deductions and credits. Study the credits well, as those benefits reduce your taxes dollar by dollar. In other words, if you owe $1,000 in taxes and receive a $150 tax credit, your taxes owed decrease to $850. That’s an extra $150 in your pocket. By spending a few hours each year keeping abreast of the tax law, you can save thousands on taxesover the years. In fact, keeping a tax-reduction mindset in your everyday life will serve your finances well. Here are 16 tips to reduce what you pay in taxes:
1. Retirement account contributions are a top tax-reduction tool, as they serve two purposes. Most contributions (except the Roth individual retirement account) allow you to deduct from your taxable income the amount paid into the retirement account. This reduces your total taxable income. These funds also grow tax-free until retirement. If you start early, this strategy alone can secure your retirement.
2. Contribute to a health savings account if you have a high-deductible medical plan. The contributions unused for medical expenses can roll over indefinitely and grow tax-free (similar to the assets in a retirement account).
3. Combine a vacation with a business trip, and reduce vacation costs by deducting the percent of the unreimbursed expenses spent on business from the total costs. This could include airfare and part of your hotel bill (proportionate to time spent on business activities).
4. If you work for yourself or have a side business, don’t be afraid to take the home office deduction. This allows you to deduct the percent of your home that is used for your business (on Schedule C, 1040). If the guest bedroom is used exclusively as a home office, and it constitutes one-fifth of your apartment’s living space, you can deduct one-fifth of rent and utility fees for your home office.
5. Self-employed individuals (either full time or part time) are eligible for scores of tax deductions. A few of those expenses include business-related vehicle mileage, shipping, advertising, website fees, percent of home Internet charges used for business, professional publications, dues, memberships, business-related travel, office supplies and any expenses incurred to run your business.
6. Self-employed individuals who pay 100 percent of their Social Security taxes owed (15.3 percent) can deduct 50 percent of the taxes paid. You don’t even need to itemize to claim this tax deduction.
7. Unreimbursed vehicle expenses are another frequently overlooked tax break. You can’t deduct commuting costs, but if you travel to satellite offices or drive your own vehicle for business and aren’t reimbursed, you can deduct mileage costs.
8. Tax credits are gold. They are deducted from the tax owed. The American Opportunity Tax Credit is available for all for years of college. You receive a tax credit on 100 percent of the first $2,000 spent on qualifying college expenses and 25 percent of the next $2,000 for a maximum of $2,500 per student. That’s $2,500 deducted from the amount of tax owed (as long as you meet certain income requirements regarding school courses that improve job skills).
9. The Lifetime Learning Credit is great for adults boosting their education and training. This credit is worth a maximum of $2,000 per year (up to 20 percent of up to $10,000 spent on post-high school education) and helps pay for college and educational expenses that improve your job skills.
10. The Earned Income Tax Credit lowers the overall tax bill for low- and moderate-income working families.
11. The state sales tax break gives itemizers the chance to either deduct state income or state sales taxes paid. This benefit is great if you live in a state without income taxes.
12. Investors: When calculating the cost basis after selling a financial asset, make sure to add in all of the reinvested dividends. That increases the cost basis and reduces your capital gain when you sell the investment.
13. Charitable deductions made with payroll deduction (such as the United Way), checks, cash and donations of goods and clothing are all deductible. These deductions add up and are often overlooked. Don’t forget to include the cash you give to the Salvation Army and the $20 you place in the collection plate at church each week.
14. If you are an adult child who is not claimed as a dependent by your parents, here is a possible tax break for you. If your parents pay back your student loans, the IRS assumes the money was given to the child, who then repaid the debt. Thus the young adult child can deduct up to $2,500 of student loan interest paid by his or her parents.
15. I remember tallying job hunting costs to deduct from my meager tax bill in the past. If you’re looking for a job in the same field, you can deduct all related expenses as miscellaneous expenses if you itemize (they must pass a 2 percent threshold). You can deduct these expenses even if you didn’t find a new job.
16. Are you in the military reserves, such as the National Guard? If you travel more than 100 miles from home and need to be away overnight, you can deduct lodging and half of the cost of meals while you are away. Of course, you can also deduct mileage costs.
Do not count on a tax preparer to know every deduction for which you are eligible. Be a smart consumer and know the tax benefits you can claim. Every additional deduction you claim increases your disposable income.
