Top 10 Tax Savings Tips/Strategies for 2007
Posted on January 30, 2008
Filed Under Finance, Tax Tips, top 10 |
You could save thousands by taking just 60 minutes to implement these 10 tax-saving strategies. $8,000 can be saved for a hypothetical family with $50,000 in taxable income.
Take about 60 minutes to plan your taxes and you could save several thousand dollars this year.
This isn’t hyperbole; these are simple, readily available tax-reduction techniques. Some of them you can do now, even if it’s the end of the year. Some require you to plan in advance and do them over the course of the year. Some you can take advantage of only once, but let’s make this the year. And it’s highly unlikely you can — or would even want to — take all of these tax-saving techniques in the same year. But this is meant to show you what’s possible.
To make this a little more realistic, we’ll make up a hypothetical family with taxable income this year of $50,000. Let’s assume both spouses work, which puts them in the 28% tax bracket. That means that for every $100 found in deductions, they’ll save $28. We’re also going to assume that this family has three children between the ages of 14 and 17. (Most of these tax tips will work regardless of your marital status or whether you have other dependents.)
Given those criteria, we can cut nearly $8,000 from this family’s tax bill. To repeat: It’s unlikely that you could or would do all of these in the same year, but for purposes of this story, it shows you the 10 ways to get the biggest bang for your tax dollars — with less than an hour’s worth of preparation.
1. Prepay your Jan. 1 mortgage payment.
If you mail out the check on Dec. 31, the interest expense deduction for that month is good for this year even though it won’t get cashed until next year. An amortization schedule will tell you how much more to deduct in interest for that month. Assume your mortgage payment for that month included $900 in interest. By paying one day early, you get:
Tax savings: $252
2. Charge your tax-deductible items for January in December.
For example, some religious institutions allow you to make contributions on your credit card. If you planned to make a January contribution of $1,000 for annual dues for your family, charge it Dec. 31. The IRS counts that as your date of the contribution even though you don’t actually receive the bill until 30 days later and don’t pay it for another 30 days.
Tax savings: $280
3. Donate your old clothes and furniture to charity.
Make a quick assessment of the items you’ve got that are just taking up space and are no longer used. The wholesale fair market value of the goods you contribute is allowed as a charitable deduction. Don’t forget to get a receipt. Let’s say those old clothes and furniture have a wholesale value of $1,600.
Tax savings: $448
4. Maximize your retirement contributions.
If you haven’t already, the end of the year is the time to contribute to your retirement saving plan(s). Put as much as you can into your 401(k), your Keogh, Simplified Employee Pension (SEP) plan or your IRA. Something as simple as another $2,000 into a qualified retirement savings account saves this family another $560.
Tax savings: $560
5. Bunch your medical expenses.
Your medical deductions are allowed only to the extent they exceed 7.5% of your adjusted gross income. Assume that your adjusted gross income was $70,000. (Remember that the taxable income of $50,000 is after all deductions and personal exemptions.) That means that the first $5,250 of the medical expenses you pay don’t count. Only the excess is deductible.
If you’re not going to exceed the minimum floor, defer paying medical expenses until next year. If you are going to exceed the floor (and are going to be itemizing your deductions), accelerate your expenses — such as prepaying for your child’s orthodontia or some type of elective surgery that you planned. Let’s say that resulted in $300 of deductible expenses.
Tax savings: $84
6. Bunch your miscellaneous itemized deductions.
These deductions are only allowed to the extent they exceed 2% of your adjusted gross income. Therefore, the first $1,400 of these deductions paid won’t count. If you’re not going to exceed the floor here as well, defer your purchases until next year with the hopes of reaching the floor in that year.
If you will exceed the floor, accelerate your purchases. Prepay investment expenses, purchase tax books, prepay your CPA for next year’s tax preparation, pay your annual Keogh fee directly, etc. Let’s say this family could find $1,500 in miscellaneous deductions.
Tax savings: $420
7. Use your Flexible Savings Account (FSA).
Many employees have the opportunity to decrease their earnings and put those dollars into a use-or-lose account for certain expenses such as child care and medical expenses. Those dollars can be withdrawn tax-free if used for those expenses. It, in effect, makes all these expenses fully deductible even if you don’t itemize.
Under this FSA (sometimes called a “cafeteria plan”), you must estimate your expenses before the beginning of the year. Any dollars not used in the year are lost. But if you can use an FSA to pay medical insurance, dental work and other allowable expenses, the savings are substantial. Even if you don’t itemize, if you use an FSA to pay $4,000 in expenses, you’ve saved big.
Tax savings: $1,120
8. Invest under your children’s names.
Each of your children can earn $700 in investment income and pay zero taxes on that amount. Since your children all are over 14, they can each earn another $26,250 and be taxed at the 15% rate. This would still save you 13% in your 28% bracket. For purposes of this exercise, let’s say you moved $1,000 in interest income to each of your children ($700 taxed at zero and $300 taxed with a savings of 13%).
Tax savings: $705
9. Hire your children.
If they are under age 18, you don’t have to pay any Social Security or other payroll taxes unless you are incorporated. You can hire them to clean your rental properties, to file and make calls for you as an employee or, if you are self-employed, to do just about anything that relates to your business. If you are self-employed, what you pay them also reduces your own Social Security tax due by 15.3% of the wages paid (if you have a net income of not more than $76,200).
If you hire your children, what they receive is “earned income.” That means that the first $4,400 received by each child is taxed at zero. They can earn another $2,000 (for a total of $6,400 for our family), put it into an IRA and still pay zero taxes.
But you might not have $19,200 to pay your children. Assume you do pay each child $3,000 for the year. (A great way to accumulate a college fund!) That gives you a $9,000 tax deduction. If you are below the Social Security maximum of $76,200 before the deduction, this transfer of dollars from one pocket to another in the same family will give you a big tax boost.
Tax savings: $3,897
10. Invest in yourself.
The Taxpayer Relief Act of 1997 created the Lifetime Learning Credit for undergraduate, graduate and professional degree courses paid after June 30,1998. The maximum per-family credit is 20% of up to $5,000 of qualified tuition and fees or $1,000.
Learn something new to help you on your job. Today, knowledge is power. What better way to improve your job skills and potential income than with a Lifetime Learning Credit? Let’s say this family spent $1,000 that qualified for the credit.
Tax savings: $200
Now, you probably won’t utilize all of the tax-saving measures mentioned here. But what if you did?
Total Tax savings: $7,966
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I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.
Aaron Wakling