Tax Tips

There are a number of areas where you can save on your taxes. Which ones you choose will certainly depend on a number of factors (single, married, have children) and your economic situation. There are three general areas where you can realize savings in your tax bill to Uncle Sam. They are:

Pretax deductions
Reduction of gross income
Deductions

Your pay check is a great source for tax savings

Most employers have a number of benefits that allow you to reduce your gross income. The tax savings can be significant. Additionally, reducing your overall gross income through employer sponsored programs can also keep you from having to pay the alternative minimum tax.

401k

This is probably the best benefit you receive from an employer (well, besides your healthcare coverage). You can (and SHOULD) declare your 401k deductions as pre-tax income. A single person making $50,000 a year that puts $5,000 a year will realize a tax savings of $1250. It is very easy to figure out your savings by going into the tax tables and calculating the savings. Additionally, your employer will typically match your 401k contributions to a particular percentage.

Flexible spending accounts

Many employers offer Flexible Spending Accounts that enable you to set aside a preallocated dollar amount in an account to cover eligible out-of-pocket expenses for health care and dependent day care throughout the year. IRS rules allow you to contribute to these accounts through payroll deductions on a pre-tax basis. If you are paying for day care or spending more than $1000 a year in out-of-pocket health care costs then you can reap substantial tax savings by enrolling in a plan like this.

It is important that you closely estimate the amount that you spend annually on these expenses as any money paid into these plans that is not used will be lost. Also, make sure to carefully read all of the rules of the plan. These plans have maximum amounts that you can contribute.

Other ways to reduce your taxable income

Here are some other common tax deductions you may not be aware of. You should see a qualified tax professional to assist you with your finances.

Health savings accounts

Health Saving Accounts (HSA's) are for individuals and families that are covered under a qualified High Deductible Health Plan (HDHP) and that are not be covered by other health insurance that is not an HDHP. The following link is to frequently asked questions about HSA's.

IRA deduction

Depending on your gross income you may be able to deduct your IRA (or portions of it) from your income tax. The following are links to information pertaining to IRA's.

Info on IRA's

Tax information on IRA's

Tuition and fees

If you have expenses for tuition they may be deductible.

Being able to itemize deductions

You should always look to see if you can itemize your deductions. Itemizing deductions and filling out the 1040 is not just for the upper middle class and wealthy. You can quickly assess if you can itemize your deductions by doing the following...

Look at page of the 1040 form to determine what your standard deduction is. Next, look at schedule A and the associated instructions to see if your deductions are greater than the standard deduction.

Home ownership

If you can itemize your deductions, the interest you pay on your mortgage and the property taxes you pay are deductible.

Charitable contributions

If you can itemize your deductions, your charitable contributions are tax deductible. Giving to charity is also a great way to help others! Additionally, charitable contribution deductions are not eliminated under the Alaternative Minimum Tax (AMT) rules, as are many other deductions.

A nice link for information on tax deductions is at the IRS site. http://www.irs.gov/faqs/index.html

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