Tax Savings Tips

Tax Forms

During the annual tax filing season of January through April, many individuals wonder if every tax deduction and credit available has been accounted for. Following a few simple tips, you can remind yourself of overlooked deductions or credits that may maximize your refund or reduce balances owed.

Income Deferrals

Deferred income is money you elect to have withheld from your pay for things such as 401(k) contributions, flexible spending accounts and health insurance. Deferred income is excluded from your gross income and is not taxable at the time of deferment. If you want to reduce the amount of money you can be taxed on in April, you can elect to defer extra amounts from your paycheck. Consider increasing your retirement plan contributions or deferring extra money into your health savings or flexible spending accounts. Since pay deferrals can take some time to build up significant savings, consider making these changes at least several months before the end of the tax year.

Dependent Care

If you have dependent children, take advantage of child care credits offered by the IRS to reduce the tax on your income. For children that require child care so you can work, you can use up to $3,000 in expenses per child for the child and dependent care credit. The good news is that the $3,000 max is not allocated to each individual child, but is rather a household maximum for children receiving care. For example, if you have two children using child care services and during the year one accumulates $1,000 in care expenses, while the other accumulates $5,000 in expenses, you can still claim the full $6,000. This credit reduces the tax you owe, but not below zero.

Tuition Expenses

If you, your spouse or a dependent child are in college, you can deduct the expense of tuition and fees on your tax return. You can optimize your savings by paying the maximum tuition fees you can afford by the end of the tax year. There are several education-related deductions and credits you may be eligible to claim, so if one credit doesn't apply for you, another should. Examples of above-the-line deductions are expenses for student loan interest and tuition and fees. This deduction reduces your adjusted gross income, which reduces the amount of income you can be taxed on. If you don't qualify for one of these deductions, you may be eligible to claim the Lifetime Learning or Hope Education credit. These credits reduce the tax you owe on your income, but not below zero.

Itemized Deductions

Unfortunately, many of the "tax deductible" pitches you receive throughout the year are only beneficial to taxpayers who can itemize deductions on Schedule A. The IRS allows each person to take either the standard deduction (based on filing status), or itemized deductions; however if the total of your itemized deductions equals less than your standard deduction you won't want to itemize.

With standard deduction amounts ranging from about $6,000 for a single filer to almost $12,000 for married-filing-joint filers, your itemized deductions have to be pretty hefty to exceed the standard amounts. Common itemized deductions include mortgage interest, property taxes, charitable contributions, state taxes paid and medical expenses. If you don't itemize, save yourself some money during the year by saying "no" to tax deductible offers you don't really want.

Self-employment Activities

Business Expenses

If you receive 1099 income or are self-employed, reduce your net business income by making business purchases before the end of the year. If you've been eyeing any big-ticket items and you have the funds, make those purchases before December 31. In addition, you can make extra payments to vendors or business credit lines and take the deduction for amounts you pay before the end of the year.

Business Income

You can reduce your year-end gross income by waiting until January 1 to invoice customers for current work. If you receive automatic payments for contract work and can afford to defer income, request that your payments not be issued until after the New Year. Since income is reported in the year it is received, you can reduce your taxable income by waiting to be paid. You should know this does not apply to checks received in December, but not cashed until January. If you receive the money before the end of the year, you must report it even if you do not cash or deposit the funds.

Professional Assistance

Regardless of whether you prepare your own taxes or use the services of an accountant, you can always request a consultation with a tax advisor to answer questions concerning your specific circumstances. If you are not an existing client of the tax professional you consult with, you may have to pay for the consultation. However, creating a custom plan with tax savings tips specific to your needs can help you save on taxes year after year and is well worth the expense of professional advice. It is best to consult with a CPA or Enrolled Agent who regularly prepares taxes when seeking this type of advice.

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Tax Savings Tips