12 Simple Tax Savings Tips for 2009
Reducing your tax bill is much simpler than you may think. When it comes to shelling out your hard earned cash to Uncle Sam, there are easy things to do that will enable you to save money on your taxes and in many cases will even give you a return on your investment. You might also be thinking now that December 31st has come and gone and you’ve lost any further chance for a 2008 tax savings, but that simply isn’t true. Here are 12 straightforward tips to save money on your 2008 taxes and plan for 2009.
1. Contribute to your 401K retirement fund. Most employers offer a 401K program and in many cases will match your contributions throughout the year. This offers a wonderful way to save for retirement. The added benefit is that whatever is paid to your 401K is deducted from your gross pay prior to taxes thus reducing the overall income tax you pay.
{SIDEBAR} The 401K Match Game: Keep in mind that you will have a maximum allowable per year for what you can set aside but this does not include any employer matches. Most employers who offer a 401K program will offer some type of equivalent, for instance 25 to 50 cents for each dollar you contribute. No matter what the amount is, if an employer pitches into you’re plan then you’ve just added to your annual investment!
2. Make a Catch Up Contribution. If you’re 50 or older, make a catch-up payment to your employer-sponsored retirement account. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) created this provision so that older individuals would be able to set aside enough savings for retirement. Just like a regular retirement account, any amount you pay in is pulled from your pre-tax gross income meaning you pay less income tax.
3. Make a charitable donation. Americans are generous. In 2007 alone, we gave an estimated $300 billion to charitable organizations. It feels good to give but it's also nice to see your donations pay off as a tax deduction too. Clean out your closets or garage and take your unwanted items to Goodwill, The Salvation Army or another charitable organization. Just make sure you get a receipt. Gifts to charity, whether they are cash, goods or services, are all deductible.
{SIDEBAR} Qualified Charitable Organizations: If you donate money or property to a "qualified organization" (see list below for examples) your donation can be deducted, but beware that there are limits and if you don’t itemize using Schedule A on form 1040, you cannot claim your charitable contributions. Here are some types of organizations that can qualify you for a tax deduction:
•Churches, synagogues, temples, mosques and other religious organizations.
• Federal, state and local governments, if your contribution is used for public purposes.
• Nonprofit schools and hospitals.
• Public parks and recreation facilities.
• Salvation Army, Red Cross, CARE, Goodwill, United Way, Boy and Girl Scouts, etc.
• War veterans' groups.
4. Participate in a flexible spending plan or FSA. An FSA will allow you to set aside a portion of your earnings to pay for qualified expenses. Money deducted from your salary into an FSA is not subject to payroll taxes and therefore results in a substantial tax savings on your pay check. Whether you pay for child care, have out-of-pocket medical expenses such as co-pays, over-the-counter medicines, medical equipment or other items, you can most likely submit your receipts to your flexible spending account. Beware though when you’re deciding on how much to contribute, keep in mind there are usually limits and that if you do not use it by the end of the year you may lose it.
5. Make energy efficient home improvements. Thanks to the Energy Policy Act of 2005, Uncle Sam is now encouraging taxpayers to invest in home improvements that make our homes more energy efficient. By using systems that include energy resources such as solar, a one-time tax credit can be applied to improvements made on your primary residence (not rental property). If you’re building a new home, ask your builder to seek the tax credit for making it a high-performance home. It's a "win-win" situation when you can save on your taxes as well as your energy bills and let’s not forget you’ll be helping the environment too.
6. Deduct expenses for your home business. When you use part of your home for business, you may be able to deduct expenses for what the IRS calls the "business use of your home." If you meet the requirements, you should be able to claim a percentage of many of the costs of running your home, for example utilities, rent, insurance, depreciation, mortgage interest, real estate taxes, and some casualty losses, repairs, and improvements (if they relate to the part of the house you use for business). The great news is that home office deduction is available to renters and homeowners alike.
{Sidebar} What Qualifies As a Home Office? Your home office must be a place that is used exclusively and regularly for your trade or business. If you use your garage to do mechanical repairs or a greenhouse near your home to grow plants for sale these would qualify as home offices.
7. Itemize your deductions. It can pay to itemize your deductions instead of taking the standard ones allowed by the IRS. For instance, using a Form 1040 Schedule A, you can claim medical and dental expenses, mortgage interest, charitable and employee expenses not paid for by an employer. The object is to have your total itemized deductions greater than the applicable standard ones; this lends itself to having a lower taxable income.
8. Contribute to an Individual Retirement Account (IRA). When it comes to Individual Retirement Accounts (IRA’s), you have several choices. All offer some tax savings. The general IRA deduction limit is $5,000 and there is an additional $1,000 for filers over 50. Be sure to keep in mind that when it comes to IRA’s, whatever you put in will not be a direct tax write off but rather will result in giving you a lower adjusted gross income. The less taxable income you have, the smaller the check you have to send to the IRS; this coupled with saving for your retirement is another “win- win” situation. An added benefit of contributing to IRA’s is that you can add money until April and have it counted on the previous year’s tax return.
9. Contribute to a 529 plan. A 529 college savings plan is a very simple way to save money for your kids' (or anyone else's) college education. The benefits are tremendous. One of which is that you pay no taxes on the account's earnings. Another plus is that the child doesn't have control of or access to the account, you do. If the child decides not to go to college then you can roll the account over to another family member.
{SIDEBAR} The 411 on the 529: Anyone can contribute to a 529 account (grandparents, aunts, uncles etc). There are no income limitations that might make you ineligible for an account and most states have no age limit for when the money has to be used. If the child gets a scholarship, any unused money can be withdrawn without paying any penalty (just the tax).
10. Pay your January Mortgage payment in December. A little year-end attention to your mortgage could lower your upcoming IRS bill. Unlike rent, which you pay beforehand, your mortgage payments are made at the end of your occupancy period. That means your Jan. 1 mortgage statement represents interest for the month of December, making it a tax-break-eligible bill for this year. By accelerating that payment even by just a day (Dec. 31, if your financial institution is open for business then), you get an additional deduction for the interest paid. Don't get greedy, though. You can't make your February, or any other upcoming mortgage payment, early to boost your year-end deduction amounts. Each year, you can deduct only that home mortgage interest for that year.
{SIDEBAR} The 411 on the 529: Anyone can contribute to a 529 account (grandparents, aunts, uncles etc). There are no income limitations that might make you ineligible for an account and most states have no age limit for when the money has to be used. If the child gets a scholarship, any unused money can be withdrawn without paying any penalty (just the tax).
10. Pay your January Mortgage payment in December. A little year-end attention to your mortgage could lower your upcoming IRS bill. Unlike rent, which you pay beforehand, your mortgage payments are made at the end of your occupancy period. That means your Jan. 1 mortgage statement represents interest for the month of December, making it a tax-break-eligible bill for this year. By accelerating that payment even by just a day (Dec. 31, if your financial institution is open for business then), you get an additional deduction for the interest paid. Don't get greedy, though. You can't make your February, or any other upcoming mortgage payment, early to boost your year-end deduction amounts. Each year, you can deduct only that home mortgage interest for that year.
11. Rent out your second or vacation home. If you rent your vacation or second home to paying guests fewer than 14 days per year, regardless of the amount of rent received, that rent need not be reported on your income tax returns. Maybe it’s not an astronomical number but any tax savings is a good one.
12. Deduct your student loan interest. You are eligible to deduct some, if not all, of the interest you paid on your educational loans (that’s money used to pay for education expenses only). The deduction is based on the interest paid on the loan during the previous tax year with a maximum deduction of $2,500. Restrictions on income limits apply. Check with your tax advisor to see if you qualify. Even if you don't itemize deductions when you file a tax return you can still claim this interest to reduce your taxes.
Tax laws can vary from year to year, so it is essential to keep up with the changes if you want to maximize your savings. If you’re not comfortable with keeping up with tax law yourself, use a CPA or tax software such as Turbo Tax with a “deduction finder”. You may be able to take advantage of some or all of these tips depending on your age, lifestyle and financial standing. No matter what the changes are, it’s good to know you can be smarter with your money while making it work harder for you.
Posts
