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34 Tax Tips to boost your Savings

Posted on: 27th Dec, 2007 09:49 pm
Its tax time again! So while you're on a festive mood, care to take out some time and look through the tax saving options, deductions and credits you qualify for. Off-course, you could have started off earlier but even if you haven't, this may be the right time to run the figures.

While you plan for your taxes, here are 34 Tips that can help you have a stress-free tax season.

1. Early Mortgage Payment

If you're paying for your mortgage on a monthly basis, it's better to make your January, 2008 payment in December, 2007 itself. It will help you deduct the extra interest on 2007 taxes provided you take the itemized deduction.

2. Deduct Points

If you have refinanced and used the loan proceeds to improve your primary home, then points paid at the time of refinance are deductible in the entire year.

Now, if it's a second time refinance, and the points on the previous refinance (amortized over the life of the loan) aren't deducted fully, then those points can be considered for deduction. But this is allowed only if you refinance with a different lender.

3. Pay PMI Premiums

If you're on a mortgage, you may opt for private mortgage insurance (PMI) policy and avail tax benefits on the premiums. But not every borrower qualifies for the deduction, as certain factors are involved here. You need to check Schedule A form to claim this tax break. Know more….

4. Defer Gains by 1031 Exchange

In case you earn a profit by selling your home, you may have to pay capital gains tax provided you don’t qualify for the exemptions. One way of avoiding such taxes is to re-invest the sale proceeds in a like-kind of property wherein you can defer gains till the replacement property is sold.

5. Benefits from Second home

The interest on a second home or vacation property is deductible provided it is a qualified home. The Schedule A is applicable here. If you have a second home and offer it for rent for a certain part of the year, you must also use it for some time in the same year so that it becomes a qualified home.

You need to use the home for more than 14 days or more than 10% of the number of days during which you've rented out the home, whichever is longer. However, if the home is not used for a longer time, it will be regarded as rental property and the interest will be tax-deductible as per Schedule E.

6. Make a Gift

You can gift cash/real property up to $12000 per year to anyone without having to pay taxes.

Gifting real property worth $12000 makes more sense if it's expected to appreciate in value as it further reduces the value of your taxable estate in the forthcoming years. This is because estate tax basis is the fair market value at the time of death of the deceased owner of the property.

However, when you gift appreciated property, instead of selling it to someone, you can avoid paying capital gains tax.

7. Property Tax Prepayment

You can prepay the January payment on state property taxes this December itself and thus claim deduction on it. Thus, you can save more in taxes and use the extra money for other purposes.

8. Tax Break from Investment

If you have incurred losses in your taxable investment options, it makes sense to sell it so that you can balance capital gains incurred this year.

In case there is capital loss on selling an investment property, and no gains as such or your gains are lower than the loss, then you can offset the loss against $3000 (on a yearly basis) of your ordinary income (for married couples filing separately, it is $1500) and thus reduce the taxable income. But if the loss is higher than $3000, then you can carry over the additional amount to offset against another $3000 of your income in the next year and so on.

9. Investment Property Repairs

If there is some repair work done to keep your investment property in good condition, then the payments are deductible in the year they're paid. The IRS also allows the owner to deduct an amount as depreciation each year from the cost basis (property purchase price plus improvements less depreciation included) of the property.

10. Maximize Tax-free Income

You can make the most of your tax-free income and exclude up to $250,000 ($500,000 for married couple filing jointly) in capital gains from selling your primary home. Know more….

11. IRA and Pension Plans

You can contribute to a Traditional IRA, and save huge dollars in taxes because the contributions are not included as your taxable income. If you are self-employed, contributions to an Self-employed Pension or Keogh Plan may also help you get tax benefits up to a certain limit. But if you're short of money, you can still contribute till April 15 as you can then count it for 2007 deduction.

You can contribute up to $4000 into an IRA (for 2007) or $5000 if you're 50 years old and if you're married, there's the chance to contribute double the amount. Those who are self-employed can put $45000 more into their plans.

However, you won't get deductions for contributions to a Roth IRA. However there are still benefits involved because the earnings and the withdrawals are tax-free.

12. Educational IRA

You can contribute up to $500 to an Education IRA of your child in addition to the $2000 annual contribution to your own IRA. Contributions to the Education IRA may not be tax-deductible but they grow tax-free.

Moreover, the withdrawals don't require tax till the child uses them when he's 30 years old to pay expenses for higher education. However, if your adjusted gross income is between $95,000 and $110,000 (for single filer) and between $150,000 and $160,000 for married couples filing jointly, the contribution will be reduced.

13. Contribute Maximum to your 401k

If you haven't reached the $15,500 annual contribution limit to your 401k plan account, there's still some time left for you to do so with your pre-tax dollars, which can further reduce your taxable income. In case you're 50 years or older then there's the catch-up contribution of $5000 for a total of $20,500. The limits here will remain unchanged in 2008.

However, for a self-employed person, there's more to contribute in a solo 401k and that's 20% of your self-employment income in addition to the $15,500 mark. And, the catch-up contribution applies here also.

14. Use your Spousal IRA

If you have a non-working spouse or one who isn't earning much, you can set up a Spousal Traditional IRA for your spouse and contribute thereby getting tax deduction on it. If you're not involved with any other retirement plan, then you can deduct the full amount of your Spousal IRA on your tax returns.

However, if you have a retirement plan offered by your employer, then your spousal IRA will be deductible only if your adjusted gross income is lower than $150,000. The IRA contributions will be partially deductible if your adjusted gross income is between $150,000 and $160,000.

15. Donate IRA Money

If you are 70 and 1/2 or older, you can offer up to $100,000 of your IRA money to an IRS qualified charity and thus reduce the value of your taxable estate. So, your heirs need not pay a huge amount of tax. At the same time, you can avoid paying taxes on minimum distributions taken from the IRA.

16. Defer Gains from Stocks

If you own stock, mutual funds or other securities and are likely to be in the lowest tax brackets of 10% and 15% next year, then it's better not to sell off the stocks right now. Wait till Jan1 as because those in the 10% and 15% tax brackets will not have to pay capital gains tax from the sale of assets they've held for more than a year.

The zero capital gains tax for 2008 is applicable to single filers having taxable income of $32,550 and married couples with joint income of $65,100. The zero tax provision is likely to end by end of 2010.

17. Donate Stocks

You may have stock with huge capital gains held for more than a year. You can donate the stock to a qualified charity and then claim deduction for its current fair market value.

However, if you haven't gained from the stock, then sell it off, claim the capital loss and after that donate it to some charity. By doing so, you will no doubt, get the same deduction but you need not pay capital gains tax due to appreciated stock value.

While you claim deduction for donations, keep a receipt or canceled check as a proof so that the IRS doesn't reject the tax break in the absence of a written record.

18. Contribute to 529 Plan

Another way to get tax breaks is to contribute to a state savings plan such as 529 Plan for up to $12,000 per year for your youngster's education wherein you need not pay gift tax. Such contributions aren't tax deductible on your federal return but more than 30 states allow for such deduction from the state income taxes.

The amount put into the savings plan grows tax-deferred and withdrawals are tax-free, provided the cash is used for college expenses. However, the 529 Plan may affect your eligibility for Medicaid as it is regarded as an asset (except in Arkansas).

19. Flexible Spending Account

You can contribute to a Flex Plan or Flexible Spending Account in order to pay for medical or dependent child care expenses. The cash contributed is deducted from your paycheck prior to paying any kind of tax. This reduces your taxable income and thus helps you to save thousands of dollars in taxes.

20. Check out the AMT

If your income is above $75,000 then you need to check out whether you qualify for the Alternative Minimum Tax (AMT). In case the AMT is higher than the regular tax liability, then you'll have to go for the former. And, if you're into paying the AMT, you won't be able to deduct state and local income taxes as well as property taxes under this system.

Under the AMT system, you can deduct medical expenses if it exceeds 10% of your adjusted gross income. Moreover, the interest on up to $100,000 of home equity loan is deductible provided you use it to buy or improve your primary or second home. Whereas in case of the general tax system, you can deduct interest on the equity loan is deductible no matter how the money is utilized.

21. Defer Self-employment Income

Those who are self-employed can defer their income by sending customer bills in January. Thus, they need not include that income in their 2007 tax return. However, if you expect to be in a lower tax bracket next year, only then it makes sense to defer the income.

22. Deduct Sales/Income Tax

You can claim the state income tax or state sales tax you've paid on your federal income tax return. For this, you should itemize and use Schedule A. In case your state (for eg; Florida, Nevada, Texas etc) doesn't require income tax, you should start adding the sales taxes paid so that you can calculate the deduction.

23. Health Insurance Tax Credit

If you’re a self-employed person, you can deduct the full cost of the health insurance program you’ve purchased for your dependents/spouse. The deduction equals the amount obtained after subtracting 50% deduction for self-employment taxes and contributions to retirement accounts like SEP-IRA (Simplified Employee Pension), Keogh Plan or Simple-IRA from your self-employment income.

24. Energy-efficient Tax Credit

You may qualify for federal tax credit if you purchase energy-efficient products (windows, geothermal heat pumps, solar pumps etc.) or use them to renovate your home. The maximum credit is $500. However, you need to check out the rules applied here and find out if your state allows for such tax break. However, the tax credit is likely to end by January 1, 2008.

25. Purchase Hybrid Car

Depending upon the model, you can get tax credit from $250 to $3000 if you buy energy-efficient hybrid cars. However, the credit will reduce to half once 60,000 such cars are sold off and then again to one quarter of the original value after 6 months as more cars are sold.

Since by Jan1, the tax credit would reduce to half, so if possible, try to buy the car (Honda, Ford Motor, General Motors etc) by the year end itself so that you get twice the tax credit you'll possibly get in January.

26. Claim Medical Expenses

If you are the one who itemizes the taxes, then you can claim eligible medical expenses (not covered by Medicaid, medicare and health insurance). But the expense shouldn't go beyond 7.5% of your adjusted gross income. And, you can even include your dependent's medical expenses.

In case you have traveled for medical treatment, you can deduct driving costs up to 20 cents per mile for any trip this December or throughout this year and this includes the parking as well as toll costs. Refer the IRS allowed Tax deduction.

27. Avail Kiddie Tax Benefits

Parents may place their assets in their child’s name to avoid paying taxes at higher rates. But once the assets grow up worth $1700, the Kiddie tax has to be paid. This amount is taxed at the parent's higher rate.

Usually children under 18 qualify for this tax but for 2008, the age limit will increase to under 19 and even full-time students under 24 will qualify. So, in that case, some parents might think of selling off the assets at the year end so that there isn’t any asset left for taxes next year.

However, this may be a wrong step; for instance, if some assets have suffered a loss, then it may be wise to sell them off next year and offset the loss against capital gains thereby reducing your tax payment.

28. Make a Big Purchase

If you are the one who deducts state sales tax instead of state income tax on your federal tax return, making a big purchase such as car or boat may help you deduct more.

Usually for most taxpayers, the state income tax makes way for higher deduction. But for states like Texas and Florida, which do not charge income tax, the sales tax deduction is what matters. Depending upon your family size and income, you can either add up the sales tax from the receipts or check out the state-wise IRS tables.

29. Social Security Taxes

If you are a wage earner, you cannot deduct Social Security and Medicare taxes. However, if you are self-employed, you may be able to avail tax deduction on the benefits. Refer to what the Social Security says.

30. Benefits for Elderly/Disabled

You may be a retiree or disabled (have taxable disability income); in such a case you can get a tax credit provided you are aged 65 years or older. But your adjusted gross income should remain below the defined limits – for single filer, its $ 17,500, for married and filing jointly its $20,000 with one spouse being eligible. If both spouses are eligible, the limit extends to $25,000.

31. Avail SUV Deduction

If you are self-employed and need to buy sports utility vehicle (SUV) for your business, you can get it just before the year ends. This will help you to deduct several dollars in taxes. However, this tax break may not exist in 2008.

32. Loss due to Casualty and Theft

One can claim tax deduction on losses due to theft, casualty or even disasters on your itemized Schedule A. However, the entire amount isn't deductible; you need to fill up Form 4684 to find out how much you can claim.

33. Deduct Classroom Costs

You may be a teacher or a teacher's assistant. In such a case, you can deduct up to $250 of the cost of books, software and other items used in the classroom. But for this, you needn't itemize but act quickly because this deduction is likely to expire by 2007 year end.

34. Miscellaneous Items

There are certain miscellaneous items such as job–related educational costs, subscriptions to business publications for which you can get tax breaks. But the expenses shouldn't exceed 2% of your adjusted gross income.

In case you are close to the 2% mark, you can prepay some of the miscellaneous expenses or even extend the journal subscription for one more year and thus avail the tax benefits.

Tax planning is no doubt hectic, but it helps you save big bucks on your tax payments by making use of deductions and tax credits. You may opt for either of the deductions available - standard or itemized. However, if your expenses are likely to give you higher tax breaks, go for the latter and do consult a tax advisor prior to filing your returns.
yes it's time time and we'are all gearing up for the big figures! but i'm supposed to get some benefits this time as I've contributed to my 401k and have even bought energy efficient items, so that will give me some credit too!
Posted on: 27th Dec, 2007 10:08 pm
The info. on tax exemptions available for health insurances has simply helped me a lot. I'm giving it a thought to get one for myself.
A great way to avoid tax!! :D
Posted on: 28th Dec, 2007 01:40 am
Yeah, its again tax time and we have to run out of our hard earned money. Last year my 401k contribution helped me a lot to save money. This year I had planned to contribute on 529 plan and I have a plan to buy a new car tomorrow itself, so I can go for an energy-efficient hybrid car. :)
Posted on: 28th Dec, 2007 02:50 am
I've offered a cash gift worth $15,000 to my cousin, so i'm on for tax break on a part of it. And i've also done some renovation in my home with energy efficient i think i'll qualify for some breaks and offcourse I've already prepaid my property taxes.
Posted on: 31st Dec, 2007 03:22 am
It is really interesting to know that there are so many ways to get tax benefits. In fact, there are many who are not aware of the tax deductions based on the classroom costs or loss due to casualty or theft. This will help them to get important information on these and use the benefits when that is required.
Posted on: 04th Jan, 2008 04:39 am
Thanks for all the advice. I'm sure to use some of them.
Posted on: 06th Jan, 2008 02:22 am
what a great article, thank you for taking the time to compile this and come here and share it with all of us, sure could use posts like this around tax time.
Posted on: 14th Feb, 2008 03:47 pm
Posted on: 14th Feb, 2008 03:47 pm
tax time- isnt that fun:D
Posted on: 05th Mar, 2008 06:08 am
We always end up doing our taxes at the last minute ,no matter how determined we are . This year though we have an extra incentive of the rebate .If we don't get them in on time we will loose the rebate.
Posted on: 11th Mar, 2008 10:52 am
Well patricia, are you talking about the tax rebates suggested in the Economic Stimulus Bill?
Posted on: 12th Mar, 2008 12:29 am
No, you will get it later though.
Posted on: 19th Mar, 2008 08:52 am
Can I defer gain from stocks which were sold on 2007, and claim it on 2008?
Posted on: 31st Mar, 2008 10:51 am
Hi Sue,

Welcome to the forum.

I think you can do it. If your loss is more than $3000 then you can carry over the excess amount to the next year. You should contact with a professional regarding this.

Best of luck,
Posted on: 01st Apr, 2008 03:07 am
You really should consult a tax professional on this, they will better be able to help you.
Posted on: 20th Apr, 2008 12:33 pm
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